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THE THEORY OF
BUSINESS ENTEBPRISE

THE THEORY OF
BUSINESS ENTERPRISE

THOKSTEIN VEBLEN

22o79H

COFYHIGHT, 1904. BY
CHARLES SCRIBNER'S SONS

PaUithed Sei»tember, 1904

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PREFACE

In respect of its point of departure, the follow-
ing inquiry into the nature, causes, utiHty, and
farther drift of business enterprise differs from
other discussions of the same general range of
fects. Any unfamiliar conclusions are due to
this choice of a point of view, rather than to
any peculiarity in the facta, articles of theory, or
method of argument employed. The point of view
is that given by tlie business man's work, — the
aims, motives, and means that condition current
business traffic. This choice of a point of view
is itself given by the current economic situation, in
that the situation plainly is primarily a business
situation.

A much more extended and detailed examina-
tion of the rami6cation8 and consequences of busi-
ness enterprise and business principles would be
feaable, and should give interesting results. It
might conceivably lead to something of a revision
(modernization) of more than one point in the
current body of economic doctrines. But it should

PREFACE

apparently prove more particularly interesting if it
were followed up at large in the bearing of thia
modem force upon cultural growth, apart from
what is of immediate economic interest. This cul-
tural bearing of business enterprise, however, be-
longs rather in the field of the sociologist than in
that of the professed economist; so that the pres-
ent inquiry, in its later chapters, sins rather by
exceeding the legitimate bounds of economic dis-
cussion on this head than by falling short of them.
In extenuation of this fault it is to be said that
the features of general culture touched upon in
these chapters bear too intimately on the economic
situation proper to admit their being left entirely
on one side.

Of the chapters included in the volume, the fifth,
on Loan Credit, is taken, without substantial
change, from Volume IV of the Decennial Publi-
cations of the University of Chicago, where it
appears as a monograph.

CONTENTS

IlL

IV.

VI.

VII.

vm.

IX.

Introductory • • • •

Thk Machine Pbocesb • •

Business Enterprise • •

Business Principles

The Use of Loan Credit

Modern Business Capital

The Theory op Modern Welfare

Business Principles in Law and Politics

The Cultural Incidence of the Machine

Process

The Natural Decay op Business Enterprise

PA«B

1 *

5 •

20 ^

66 •

183

177 »

268 •

302
374

THE THEORY OF BUSINESS ENTERPRISE

CHAPTER I ■••--/■.>.•.

INTRODUCTOEY ' •'.■:'/ .-.

Thb material framework of modem civilization
[ is the industrial system, and the directing force
[ which animates this framework is business enter-
prise. To a greater extent than any other known
I phase of culture, modem Christendom takes its
[ complexion from its economic organization. This
I modem economic organization is the "Capitalistic
System" or "Modern Industrial System," so called.
characteristic features, and at the same time
I the forces by virtue of wliich it dominates modern
I culture, are the machine process and investment for
I profit-
The scope and method of modem industry are
J given by the machine. This may not seem to
[hold true for all industries, perhaps not for the
' greater part of industry as rated by the bulk of
the output or by the aggregate volume of labor
expended. But it holds true to such an extent
and in such a pervasive manner that a modem ^
industrial community cannot go on except by
the help of the accepted mechanical appliances

2 THE THEORY OF BUf^INKSS ENTERPRISK

and processes. The luacijine industries — those
portions of the ijdaHfrial system in which the
machine process'is paramount — are in a dominant
position; they "set the pace for the rest of the
industrial system. Tn this sense the present is the
age of the machine process. This dominance of
.tbe machine process in industry marks off the
present industrial situation from all else of its kind.
In a like sense the present is the age of business
enterprise. Not tliat all industrial activity is car-
ried on by the rule of investment for profits, but
an effective majority of the industrial forces are
organized on that basis, There are many items
of great volume and consequence that do not fall
within the immediate scope of these business prin-
ciples. The housewife's work, e.r/., as well aa
some appreciable portion of the work on farms
and, in some handicrafts, can scarcely be classed as
business enterprise. But those elements in the
industrial world thM take the initiative and exert
a far-reaching coercive guidance in matters of in-
dustry go to their work with a view to profits on
investment, and are guided by the principles and
exigencies of business. The business man, espe-
cially the business man of wide and authoritative
discretion, has become a controlling force in indus-
try, because, through the mechanism of invest-
ments' and markets, he controls the plants and
processes, and thdse set the pace and determine

INTRODUCTOKY

the direction of niovenieut for the rest. His con-
trol in those portions of the field that are not
immediately under his hand ia, no doubt, some-
what loose and uncertain ; but in the long run hia
discretion is in great measure decisive even for
these outlying portions of the field, for he is the
only large self -directing economic factor. His con- .
trol of the motions of other men ia not strict, for
they are not under coercion from him except
through the coercion exercised by the exigencies
of the situation in which their lives are cast ; but
aa near as it may be said of any human power in
modem times, the large business man controls the
exigencies of life under which the community
lives. Hence, upon him and his fortunes centres
the abiding interest of civilized mankind.

For a theoretical inquiry into the course of »
civilized life as it runs in the immediate present,
therefore, and aa it is running into the proximate
future, no single factor in the cultural situation
has an importance equal to that of the business
man and his work.'

' " Dem unbeteiligten Beobachter dringt sich die ErkentniM aul,
duain dem FhanomeD dee Handela [bare equivalent to "busloeas"]
bin entHCbeldender allgeneiner Gedsoke enthalten uod eine der mlich-
liffUn ThatucheD der Geacbicbte gegebeu ial, mit der jede Zeit ge-
nmngen wjrd, aich nob loder Ubel sbzuflndeu. . . . Der Handel lit In
folgetichtlger and unaafhaltsamer Entnlcklung daa fiibrende Geirerbe
gcworden. Es let fUr die anderen Gewerbe elu Tiillig aosBlcbuloser
Tettncb, Uin eu hemmeu uod darch Zwangamittel In wioe ' dleaende
Stellnng' eurackiadrlingeD," — S. Tb. Reinbold, Arbeit und Werk-
L Hvff, pp. ix. X.

4 THK THEORY OF BUSINESS ENTERPRISE

This of course applies with peculiar force to
an inquiry into the economic life of a modem
community. In so far as the theorist aims to
explain the specifically modern economic phenom-
ena, his line of approach must be from tlie business
man's standpoint, since it is from that standpoint
that the course of these phenomena is directed.
A theory of the modem economic situation must
be primarily a theory of business trafBc, with its
motives, aims, methods, and effects.

CHAPTER II

THE MACHINE PROCESS

In Its bearing on modern life and modern busi-
less, the "machine process" means something
more comprehensive and less external than a
mere aggregate of mechanical appliances for the
mediation of human labor. It means that, but
it means something more than that. The civil
engineer, the mechanical engineer, the navigator,
the mining expert, the industrial chemist and
mineralogist, the electrician, — the work of all
these falls within the lines of the modern machine
process, as well as the work of the inventor who
devises the appliances of the process and that of
the mechanician who puts the inventions into
effect and oversees their working. The scope of
the process is lai^er than the machine.' In those
branches of industry in which machine methods
have been introduced, many agencies which are
not to be classed as mechanical appliances, simply,
have been drawn into the process, and have be-
come integral factors in it. Chemical properties
of minerals, e.g., are counted on in the carrying
out of metallurgical processes with much the same

' Of, Coofco Taylor, Modrni F>ti:tuiii .'iyetein, pp, 74-77.

6 THE THEORY OF BUSINESS ENTERPE.ISE

certainty and calculable effect aa are the motions
of those mechanical appliances by whose use the
minerals are handled. The sequence of the pro-
cess involves both the one and the other, both
the apparatus and the materials, in such intimate
interaction that the process cannot be spoken of
simply as an action of the apparatus upon the
materials. It is not simply that the apparatus
reshapes the materials; the materials reshape
themselves by the help of the apparatus. Simi-
larly in such other processes as the refining of
petroleum, oil, or sugar; in the work of the indus-
trial chemical laboratories ; in the use of wind,
water, or electricity, etc.

Wherever manual dexterity, the rule of thumb,
and the fortuitous conjunctures of the seasons
have been supplanted by a reasoned procedure
on the basis of a systematic knowledge of the
forces employed, there the mechanical industry is
to be found, even in the absence of intricate me-
chanical contrivances. It is a question of the char-
acter of the process rather than a question of the
complexity of the contrivances employed. Chem-
ical, agricultural, and animal industries, as carried
on by the characteristically modern methods and
in due touch with the market, are to be included
in the modern complex of mechanical industry.'

1 Even in work tbat lies an uear tbe foitulties of aniiuaU nature
U dsirjing, stock- breeding, and tbe iniproveineiit ot crop plajitu,

THE MACillNE PROCESS

I No one of the mecbaiiical procesaes carried on
by the use of a giveu outfit of appliances ia inde-
pendent of other processes going on elsewhere-
Each draws upon and presupposes the proper work-
ing of many other processes of a similarly me-
chanical character. None of the processes in the
mechanical industries is self-sufficing. Each follows
some and precedes other processes in an endless
Bequence, into which each fits and to the require-
^K ments of which each must adapt its own working.
^HThe whole concert of industrial operations is to be
taken as a machine process, made up of interlock-
ing detail processes, rather than as a multiplicity
^^ of mechanical appliances each doing its particular
^Bvork in severalty. This comprehensive industrial
^^ncocess draws into its scope and turns to account
^BiH branches of knowledge that have to do with the

^f % detenninate, reasoned routine repltwea ihe rule of thumb. By
MebBaical ,con[.ru! of his maierials the dairyman, e.g., eelecUvel;
ihtennines die rate aod kind of the biotogica] processed that change
ik i»w iDBUrial Into finished product. The Rtock-breeder'H aim ia to
ndnce the detaiU of the Inns of heredity, aa they apply within his
laid, to such definite terma aa nil! afford him a technologically occu-
nte routine of breeding, and then to apply ibis technological breeding
IfJOW to the production of such varieties of stock as will, with the
MKreot approach to mechanical exactneee and expedition, turn the
tiw materials of field and meadow into certain specil^ed kinds and
indei of dnialied product. The like is true of the plant-breeders.
AgciculturtU experiment stations and bnreaus, in alt civilized conn-
tilet, are laboratories norking toward an effective technological con-
ttol of biological factors, with a view to eliminating (orluiloua,
disnrviceable, and useless elements fTom the processes of agricultural
pradnctioD, and ev reducing these processex to a calculable, eipedi-
llous. and wasteless routine.

THK THEORY OF BUSINESS ENTEEPRISE

material sciences, and the whole makes a more or
less delicately balanced complex of sub-processes,'

liOoked at in this way the industrial procesa
shows two well-marked general characteristics:
(a) the running maintenance of interstitial ad-
justments between the several sub-processes or
branches of industry, wherever in their working
they touch one another in the sequence of industrial
elaboration ; and (b) an unremitting requirement
of quantitative precision, accm'acy in point of time
and sequence, in the proper inclusion and exclusion
of forces affecting the outcome, in the magnitude
of the various physical characteristics (weight, size,
density, hardness, tensile strength, elasticity, tem-
perature, chemical reaction, actinic sensitiveness,
etc.) of the materials- handled as well as of the
apphances employed. ■ This requirement of me-
chanical accuracy and nice adaptation to specific
uses has led to a gradual pervading enforcement of
uniformity, to a reduction to staple grades and star
pie character in the materials handled, and to a
thorough standardizing of tools and units of meas-
urement. Standard physical measurements are of
the essence of the machine's regime."

The modem mdustrial communities show an
unprecedented uniformity and precise equivalence
in legally adopted weights and measures. Some-

< CI. Snmbart, Uwlerne K<ipUalitmit». vol. n, cb. 111.

» CI. 'I\erl/l!t Cenaun (.CS.J ; ■- MauuiacUtnss," pL 1. p. Uivi.

thing of this kind would be brought about by the
needs of commerce, even without the urgency
given to the movement for uniformity by the re-
quirements of the machine industry. But within
the industrial field the movement for standardiza-
tion has outrun the urging of commercial needs,
and has penetrated every comer of the mechanical
industries. The specifically commercial need of
uniformity in weights and measures of merchant-
able goods and in monetary units has not carried
standardization in these items to the extent to
which the mechanical need of the industrial process
has carried out a sweeping standardization in the
means by which the machine process works, as well
as in the products which it turns out.

As a matter of course, tools and the various
Btmctural materials used are made of standard
sizes, shapes, and gauges. When the dimensions,
in fractions of an inch or in millimetres, and the
weight, in fractions of a pound or in grammes, are
given, the expert foreman or workman, confidently
and without reflection, infers the rest of what need
be known of the uses to which any given item that
passes imder his hand may be tm-ned. The adjuafc-
ment and adaptation of part to part and of process
to process has passed out of the category of crafts-
manlike skill into the category of mechanical
standardization. Hence, perhaps, the greatest,

>st wide-reacliing gain in productive celwity and

10 THE THEORY OV BUSINESS ENTERPRISE

efficiency through modern methods, and hence the
largest saving of labor in modern industry.

Tools, mechanical appliances and movements,
and structural materials are scheduled by certain
conventional scales and gauges ; and modem
industry has little use for, and can make little use
of, wliat does not conform to the standard. What
is not competently standardized calls for too much
of craftsmanlike skill, reflection, aud individual
elaboration, and is therefore not available for
economical use in the processes. Irregularity,
departure from standard measurements in any of
the measurable facts, is of itself a fault in any
item that is to find a use in the industrial process,
tor it brings delay, it detracts from its ready
usability in the nicely adjusted process into which
it is to go; and a delay at any point means a more
or less far-reaching and intolerable retardation of
the comprehensive industrial process at large.
Irregularity in products intended for industrial
use carries a penalty to the nonconforming pro-
ducer whicli urges him to fall into line and submit
to the required standardization.

The materials and moving forces of industry are
undergoing a like reduction to staple kinds, styles,
grades, and gauge.' Even such forces as would

■ E.g. lumber, coal, aleul, paper, wool &nd cotton, grain, leather,
caUIe for the packing houses. All these and many others are M an
increawng eitent spoken for, delivered, and disposed of under well-
ilefined staple grades as to quality and dimeniions, weight and efBcieocy.

Base,
Hlfeienl

THE MACHINE PROCESS

seem at first siglit not to lend themselveB to
standardization, either in their production or their
are subjected to uniform scales of measure-
t ; as, e.g., water-power, steam, electricity, and
human labor. The latter is perhaps the least
amenable to standardization, but, for all that, it is
bargained for, delivered, and turned to account on
ledules of time, speed, and intensity which are
tntinually sought to be reduced to a more precise
leasurement and a more sweepuig uniformity.
The like is true of the finished products. Mod-
consumers in great part supply their wants
ith commodities that conform to certain staple
fcifications of size, weight, and grade. The
insumer (that ia to say the vulgar consumer)
.ishes his house, his table, and his person with
auppliee of standard weight and measure, and he
can to an appreciable degree specify his needs and
his consumption in the notation of the standard
gauge. As regards the mass of civilized mankind,
the idiosyncrasies of the individual consumers are
reqnired to conform to the uniform gradations
fanposed upon consumable goods by the compre-
hensive mechanical processes of industry, "Local
color," it is said, is falling into abeyance in modem
Hfe, and where it is still found it tends to assort
ilf in units of the standard gauge.

this mechanical standardization of con-
mable goods it follows, on the one hand, that the

12 THE THEORY OF BUSINESS ENTERPRISE

demand for goods settles upon certain defined lines
of production which handle certain materials of
deGnite grade, in certain, somewhat invariable forms
and proportions ; which leads to well-defined meth-
ods and measurements in the processes of production,
aliorteuing the average period of " ripening " that
intervenes between the first raw stage of the product
and its finished shape, and reducing the aggregate
stock of goods necessary to be carried for the supply
of current wants, whether in the raw or in the
finished form.' Standardization means economy at
nearly all points of the process of supplying goods,
and at the same time it means certainty and
expedition at nearly all points in the business
operations involved in meeting current wants.
Besides this, the standardization of goods means
that the interdependence of industrial processes is
reduced to more definite terms than before the
mechanical standardization came to its present
degree of elaborateness and rigor. The margin of
admissible variation, in time, place, form, and
amount, is narrowed. Materials, to answer the
needs of standardized industry, must be drawn
from cert-ain standard soiu^es at a definite rate of
supply. Hence any given detail industry depends
closely on receiving ita supplies from certain.

' Well shown In tbo case of wheat and flaur ; but the like ui trae
BB regATdfl the fltockn of utltor commodities curled by prodacfira,
jnlibera, retailera, and ti

THE MACm

tilatively few, industrial estjiljlisliments whose
ork belongs earlier in the process of elaboration.
And it may similarly depend on certain other,
^^dosely defined, industrial establishments for a
^Hpent of its own specialized and standardized prod-
^Haet.^ It may likewise depend in a strict manner
on special means of transportation.*

Machine production leads to a standardization of
lervices as well as of goods. So, for instance,
modem means of communication and the
rstem into which these means are organized are
Ealso of the nature of a mechanical process, and in
} mechanical process of service and intercourse
tile life of all civilized men is more or leas inti-
mately involved. To make effective nse of the
^^modern system of communication in any or all of
^■jle ramifications (streets, railways, steamaliip lines,
^Hnephone, telegraph, postal service, etc.), men are
required to adapt their needs and their motions to
the exigencies of the process whereby this civilized
method of intercourse is carried into effect. The
service is standardized, and therefore the use of it
is standardized also. Schedules of time, place, and
istance rule throughout. The scheme of
yday life must be arranged with a strict

* Well illuBtrated by the interdependenco at the various branches
^fron and steel production.

* As seen, e.g.. in the depandenceot oil production or oil refining

cm the pipe lines and their mauogeineni, ot in the dependence of Ihe
prslrje tBrmem on the railway Unea, etc.

14 THE THEORY OF BUSINESS ENTERPRISE

regard to the exigencies of the process whereby
this range of human needs is served, if full advan-
tage is to be taken of this system of intercourse,
which means that, in so far, one's plans and proj-
ects must be conceived and worked out in terms
of those standard units which the system imposes.

For the population of the towns and cities, at
least, much the same rule holds true of the dis-
tribution of consumable goods. So, also, amuse-
ments and diversions, much of the current amenities
of life, are organized into a more or less sweeping
process to which tliose who would benefit by the
advantages offered must adapt their schedule of
wants and the disposition of their time and effort.
The frequency, duration, intensity, grade, and
sequence are not, in the main, matters for the free
discretion of the individuals who participate.
Throughout the scheme of life of that portion of
mankind that clusters about the centres of modern
culture the industiial process makes itself felt and
enforces a degree of conformity to the canon of
accurate quantitative measurement. There comes
to prevail a degree of standardization and precise
mechanical adjustment of the details of everyday
life, which presumes a facile and unbroken work-
ing of all those processes that minister to these
standardized human wants.

As a result of this superinduced mechanical
regularity of life, the livelihood of individuals is,

over large areas, affected in au approximately
uniform maimer by any iucident which at all
Beriously affects the industrial process at any point.'
As was noted above, each industrial unit, repre-
ted by a given industrial ''plant," stands in
relations of interdependence with other in-
dustrial proceases going forward elsewhere, near or
far away, from which it receives supplies — mate-
xiaJs, apparatus, and the like — and to which it
over its output of products and waste, or on
ich it depends for auxiliary work, such as trans-
portation. The resulting concatenation of indus-
tries has been noticed by most modern writers. It
IB commonly discussed under the head of the divi-
BOn of labor. Evidently the prevalent atandardi-
.tion of industrial means, methods, and products
tly increases the reach of this concatenation of
.ustries, at the same time that it enforces a

^■seute
^HOose

^^xiaJs,
^Hiiuch

' It may be aot«d !□ Uiis conneclioD, on the one baud, that a
population which Ih in no degree habituated to the modern indUBtrlal
p ro o e aa U unable to adapt its mode of life to the reituiremenu of tbii
tneUiod of supplying human wants, and so can derive but little benefit,
and poaalbly great discomfort, from a forcible intrusion of ilie
maehine industry ; u, for instance, majiy of the outlybg barbarian
peoples with whom Ibe Western industrial culture is now enforcing
a close contact. On the other hand. It is aim true that even the most
»leqaat«ly trained modem cooimunity, among whom the machine
indnsUy is beat at borne, does not respond with faultless alacrity lo
the demanda and opportunities nhlch this system holds out. The
adaptation of babits of life and of ideals and acpirations to tfae ezl-
genclea of the machine process is not nearly complete, nor does the
untrained man iumi actively fail into line with it. Even the beat-
tnlned, severely disciplined man of the industrial towns has his
Maaona ot recalcitrancy.

16 THE TKEOKY OF BUSrNKSS ENTERPRISE

close coaformity in point of tinie,Tolume, and chai^
acter of the product, whether the product is goods
or services.'

By virtue of thia concatenation of processes the
modem industrial system at large bears the char-
acter of a comprehensive, balanced mechanical
process. In order to an efficient working of thia
industrial process at large, the various constituent
sub-processes must woric in due coordination
throughout the whole. Any degree of maladjuat-
ment in the interstitial cooixlinations of this
industrial process at large in some degree hinders
its working. Similarly, any given detail process or
any industrial plant will do its work to full advan-
tage only when due adjustment is had between its
work and the work done by the rest. The higher
the degree of development reached by a given
industrial community, the more comprehensive and
urgent becomes this requirement of interstitial
adjustment. And the more fully a given industry
has taken on the character of a mechanical process,
and the more extensively and closely it is corre-
lated in its work with other industries that precede
or follow it in the sequence of elaboration, the more

I Tbe dependence of one process upon tbe working of the others
U sometiiDes Ter; etrlct, as, for inatance, In the various induBtiiea •
oocnpied with iron, including the extraction and handling of the ore
and other raw nBtcrialH. In other cnseB the correlaUon is less strict,
or even very slight, as, t.g., that between the newspaper industry
and lombering, through the wood-pulp indiutry, the chief component
ot the modem uewHpuper being wood-pulp.

THE SLACHINE I'KOCESS

l-nrgent, other things equal, is the need of maintain-

I ing the proper working relations with these other

I industries, the greater is the industrial detrimsnt

lered from any derangement of the accustomed

ffkang relations, and the greater is the industrial

to be derived from a closer adaptation

fid a more facile method of readjustment in

the event of a disturbance, — the greater is

also the chance for an effectual disturbance of

Lindustry at the particular point. This mechanical

Jeoncatenation of industrial processes makes for

BoHdarity in the administration of any group of

related industries, and more remotely it makes for

flolidarity in the management of the entire indua-

|itria] traffic of the community.

A disturbance at any point, whereby any given

■anch of industry fails to do its share in the work

||pf the system at large, immediately affects the

''neighboring or related branches which come before

or after it in the sequence, and is transmitted

through their derangement to the remoter portions

of the system. The disturbance is rarely confined

to the single plant or the single line of production

r first affected, but spreads in some measure to the

frest. A disturbance at any point brings more or

less derangement to the industrial process at large.

So that any maladjustment of the system involves

a larger waste than simply the disabling of one or

Ltwo members in the complex industrial stmcture.

IS THE THEORY OF BUSINESS ENTERPRISE

So much is clear, that the keepuig of the balance
in the comprehensive machine process of industry
is a matter of the gravest urgency if the productive
mechanism is to proceed with its work in an effi-
cient manner, ao as to avoid idleness, waste, and
.. hardship. Tlie management of the various indus-
trial plants and processes in due correlation with
all the rest, and the supervision of the interstitial
adjustments of the system, are commonly conceived
to be a work of greater consequence to the com-
munity's well-being than any of the detail work
involved in carrying on a given process of produc-
tion. This work of interstitial adjustment, and in
great part also the more immediate supervision
of the various industrial processes, have become
urgent only since the advent of the machine indus-
try and in proportion as the machine industry has
advanced in compass and consistency.

It is by business transactions that the balance
of working relations between the several industrial
units is maintained or restored, adjusted and read-
justed, and it is on tlie same basis and by the same
method that the affairs of each industrial unit are
vregulated. The relations in which any indepen-
dent industrial concern stands to its employees, as
well as to other concerns, are always reducible to
pecuniary terms. It is at this point that the
business man comes into the industrial process as a
decisive factor. The organization of the several

industries as well aa the interstitial adjustment*!
and discrepancies of the industrial process at large
are of the nature of pecuniary transactions and
obligations. It therefore rests with the business
men to make or mar the running adjustments of
industry. The larger and more close-knit and more
delicately balanced the industrial system, and the
larger the constituent units, the larger and more
far-reaching will be the effect of each business
Lmove in this field.

CHAPTER III

BUSINESS ENTERPRISE

The motive of business is pecuniary gain, the
method is essentially purchase and sale. The aim
and usual outcome is an accumulation of wealth.'
Men whose aim is not increase of posseaaious do
not go into business, particularly not on an inde-
I pendent footmg.

How these motives and methods of business
work out in the traffic of commercial enterpri.se
proper — in mercantile and banking business —
does not concern the present inquiry, except so
far as these branches of busuiess affect the course
of industrial business in the stricter sense of the
term. Nor is it necessary here to describe the
details of business routine, whether in the mer-

' The ulterior ground of efforts directed to the aecumulBtion of
wenllh la diEcusaed at Home length In the TTirory of the Le.iitu.re Cla»>,
cb. II. and V., and tlie economic bearing of the businesa man's
nork is treated in a paper on ■'Indoatrial and I'ecuniiiry Employ-
ments," In tlie Pror.tedingB ot tlie thirteenth annual meeting of the
American Economic Aaaoolatian. Cf. also Marshall, PrlncipJei of
Econoviiea (3d ed.), bk. I. ch. III., bk. IV. ch. XII., bit. V. ch. IV..
bk. Vn. ch. VII. and VIII. ; Bagphot, Eeonomie Sttuliej, especially pp.
63 et teq. ; Walker, Wagts Quegtioa, ch. XIV. ; and wore especiallj
Sombart, Moderae KapUaUrnnus, vol. I. c!i, I., VIII., XIV., XV. ;
Man, Kapital, bt. I. ch. IV. ; SchmoUer, QrandrUs, bk. II. ch. VIL
30

BUSINESS ENTEEPEI8E

Icantile pursuits or in the conduct of an industrial
rconeern. The point of the inquiry is that char-
acteristically modem business that is coextensive
with the machine process described above and is
I occupied with the large mechanical industry. The
I aim is a theoiy of such business enterprise in out-
lline sufficiently full to show in what manner busi-
uess methods and business principles, in conjunction
■irith the mechanical industry, influence the modem
I'Ctiltural situation. To save space and tedium,
I therefore, features of business traffic that are not
Rof a broad character ■ and not peculiar to this
Kmodem situation are left on one side, as being
lalready sufficiently familiar for the purpose in hand.

I In early modern times, before the regime of the ^
Btnaohine industry set in, business enterprise on any
K^preciable scale commonly took the form of com-
fcnercial business — some fonn of merchandising
Bor banking. Shipping was the only .considerable
Bine of business which involved an investment in
Bdt management of extensive mechauical appliances
■pud processes, comparable with the facts of the
biodern mechanical industry.' And .shipping was

■ > It is BlgDificant that joint-atock methods of orgunizalioti and ,
BlUDagemeDl — timt is to say, Impersonally capitaliBUc methods —
^pn tnweabic, tor their origin nnd early formula Lion, la the shipping
Bimipiiiiefl of earl^ modern tfmee. Cf. K. Lehmann, Die gtschicKUkhe
HftilMMtWlunv tU» Aktienrenhts bit ziim Code de Commeree. The like
Btow la apolieii for by Ehrenberp, ZeitalKr der Fuggrr; aee vol. II ■^,,

THE THEOKY OF BUSINESS ENTERPRISE

commonly combined with mercliandising. But
even the shipping trade of earlier times had much
of a fortuitous character, in this respect resembling
agriculture or any other industry in which wind
and weather greatly affect the outcome. The foi^
tunes of men in shipping were on a more pre-
carious footing than to-day, and the successful
outcome of their ventures was less a matter of
shrewd foresight and daily pecuniary strategy
than are the affairs of the modern large business
concerns in transportation or the foreign trade.
Under these circumstances the work of the busi-
ness man was rather to take advantage of the
conjunctures offered by the course of the seasons
and the fluctuations of demand and supply than
to adapt the course of affairs to his own ends.
The large business man was more of a speculative
buyer and seller and less of a financiering strategist
than he has since become.

Since the advent of the machine age the situa-
tion has changed. The methods of business have,
of course, not changed fundamentally, whatever
may be tnie of the methods of industry ; for they
are, as they had been, conditioned by the facts of
ownership. But instead of investing in the goods
as they pass between produceiL_and_£Qnsumer, as
the merchant does, the business man now invests
in the processes of industry ; and instead of stak-
ing his values on the dimly foreseen conjunctures

of the seasons and the act of God, he turns to
the conjunctures arising from the interplay of the
industrial processes, which are in great measure
under the control of business men.

So long as the machine processes were but

lightly developed, scattered, relatively isolated,

Old independent of one another industrially, and

) long as they were carried on on a small scale

Eor a relatively narrow market, so long the man-

[ement of them was conditioned by circumstances

1 many respects similar to those which conditioned

he English domestic industry of the eighteenth

mtury. It was under the conditions of this

hoate phase of the machine age that the earlier

ineration of economists worked out their theory

; the business man's part in industry. It was

hen still true, in great measure, that the under-

iker was the owner of the industrial equipment,

md that he kept an immediate oversight of the

mechanical processes as well as of the pecuniary

Bnsactions in which his enterprise was engaged ;

it was also true, with relatively infrequent

ixceptions, that an unsophisticated productive effi-

'riency was the prime element of business success.'

A further feature of that precapitalistjc business

aituation is that business, whether handicraft or

X Cantillon. Esaaiiarle Commerce, I'partie. oh, ni., V1.,IX.,
; WftUh nf A'affnna, bk. I. ; BUcher. EaMehung dtr VblJt*-
(3d ed.), ch. IV. Mid V. ; Sombarl. KnpUalimyu, Vol. I,

24 THE THEORY OF BUSINESS ENTEKrRISE

trade, was customarily managed with a view to
earning a livelihood rather than with a view
to profits on investment.'

I In proportion as the machine industry gained
ground, and as the modern concatenation of in-
dustrial processes and of markets developed, the
conjunctures of business grew more varied and
of larger scope at the same time that they became
more amenable to shrewd manipulation. The pe-
cuniary side of the enterprise came to require more
unremitting attention, as the chances for gain or
loss through business relations simply, aside from
mere industrial eflEciency, grew greater in number
and magnitude. The same circumstances also
provoked a spirit of business enterprise, and
brought on a systematic investment for gain.
With a fuller development of the modern close-
knit and comprehensive industrial system, the

■ point of chief attention for the business man has
shifted from the old-fashioned surveillance and
regulation of a given industrial process, with which
his livelihood was once bound up^to an alert redis-
tribution of investments from less to more gainful
ventures,* and to a strategic control of the conjunc-

' Soinbcirt, ToL J. ch. rV.-Vin. ; Asble;, EMJtomic History and
TTieory, bk. II. oh. VI., especially pp. 380-387.

' Cf. MorsbaU, Prlneiplea of Economies, on the " Lbw of Substltu-
tion," e.ff. bh, VI. ch. I. The \a\t ot subGtltution implies freedom of
inrMtmeDt nad applies fully only in so far as Ibe investor In question
Is not permanently identified with a given indiulriai plant or even willi
a given line ot indtislry. It requires great faciUt; in ahlftlug from o

BUSINESS ENTERPRISE

tures of business through shrewd investments and
coalitioDB with other business men.

yA As shown above, the modern industrial system

Pji a c oncatena^ n of processes which has much
pE the character of a single, compi-ehensive, bal-
•oced mechauical process. A disturbance of the
balance at any point means a differential advan-
tage (or disadvantage) to one or more of the
owners of the sub-processes between which tlie
disturbance falls ; and it may also frequently
mean gain or loss to many remoter members in
the concatenation of processes, for tlie balance
throughout the sequence is a delicate one, and
Uie transmission of a disturbance often goes far.
It may even take on a cumulative character, and
may thereby seriously cripple or accelerate branches
of industry that are out of direct touch with those
members of the concatenation upon which the
initial distiu'bance falls. Such is the case, for
instance, in an industrial crisis, when an appaiv
^■Btly slight initial disturbance may become the
^Hpcasion of a widespread derangement. And such,
^^Kl the other hand, is also the case when some
favorable condition abruptly supervenes in a ^ven

to ADOtlier point of investnient It Is therefore only as the bualnesa
situfttion haa approached the inodcru form that tlie law of substitution
has come to be ol considerable imporlance to economic theory ; for a
eoTy of buaiDew, such na business was ia medieval and early modem
I, tbls law need scarcely Lnve been formulated.

26 THf: THEOKY OF BUSINESS ENTERPRISE

industry ) at<, e.g., when a audden demaud for war
stores starts a wave of prosperity by force of a
large and lucrative demaud for the products of
certain industries, and these in turn draw on their
neighbors in Uie sequence, and so transmit a wave
of business activity.

The keeping of the industrial balance, therefore,
and adjusting tlie several industrial processes to
one another's work and needs, is a matter of grave
and far-reaching consequence in any modern com-
munity, as has already been shown. Now, the
meauB by wliich this balance is kept is business
transactions, and the men in whose keeping it
lies are the business men, >■ The channel by which
disturbances are transmitted fiom member to
member of the comprehensive industrial system is
the business relations between the several members
of the system ; and, under the modern couditions
of ownership, disturbances, favorable or unfavor-
able, in the field of industry are transmitted by
nothing but these business relations. Hard times
or prosperity spread through the system by means
of business relations, and are in their primary
expression phenomena of the business situation
simply. It is only secondarily that the disturb-
ances iu questiou shoiv themselves as alterations
in the character or magnitude of the mechanical
processes involved. Industry is carried on for
Uit' sake of business, and not conversely ; and the

progress and activity of industry are conditioned
by the outlook of the market, which means the '
presumptive chance of business profits.

All this is a matter of course which it may seem
simply tedious to recite.' But its consequences for
the theory of business make it necessary to keep
the natui-e of this connection between business and
industry in mind. The adjustments of industry
take place through the mediation of pecuniary
transactions, and these transactions take place at
the hands of the business men aud are carried on
by them for business ends, not for industrial ends
in the narrower meaning of the phrase.

The economic welfare of the community at
large is best served by a facile and uninterrupted
interplay of the various processes which make up
the industrial system at large; but the pecuniary
interests of the business men in whose hands lies
the discretion in the matter are not necessarily
best served by an unbroken maintenance of the
industrial balance. Especially is this true as
i^ards those greater business men whose interests
are very extensive. The pecuniary operations of
these latter are of large scope, and their fortunes
commonly are not permanently bound up with the
smooth working of a given sub-process in the
indtistrial system. Their fortunes are rather
nlated to the larger conjunctures of the industrial

THE THEORY OF ISUSINESS ENTEIil'RISE

system as a whole, the interstitial adjustments, or
to conjunctures affectiug large ramihcations of
the system. Nor is it at all imiformly to their
interest to enliance the smooth working of the
industrial system at larg^ in so far as they are
related to it. Gain may come to them from a
given disturbance of the system whether the dis-
turbance makes for heightened facility or for wide-
spread hardship, very much as a speculator in
grain futures may be either a bull or a bear. To
the business man who aims at a differential gain
arising out of interstitial adjustments or disturb-
ances of the industrial system, it is not a material
question whether his operatiorLS haw^ an immediate
furthering or hindering effect upon the system at
large. The end is pecuniary gain, the means is
disturbance of the industrial system, — except so
far as the gain is sought by the old-fashioned
method of permanent investment in some one
industrial or commercial plant, a case which is for
the present left on one side as not bearing on the
point immediately in hand.' Tlie point immedi- i
ately in question is the part which the. business
man plays in what are here called the interstitial
adjustments of the industrial system ; and so far
aa touches his transactions hi this field it is, by

' It is olilefly Uio paaaive nwiier of stock and tho like Oial holds
permanently to a gWen enterprise, under the fully developed modem
business coadlllons. Tin- active bueitiesii man of Uie larger sort is
iKit In [Ilia way bound Ui Ihe glebo of the ^Iven husinesa concern.

BUSINESS ENTERI'llISl!

I land large, a matter of indifference to him whether
itis traffic affects the system advantageoualy or
disastrously. His gains (or losses) are related to
the magnitude of the disturbances that take place,
rather than to their bearing upon the welfare of
the community.

IThe outcome of this management of industrial
affairs through pecuniary transactions, therefore,
has been to dissociate the interests of tliose men
"who exercise the discretion from the interests of
the community. This is true in a peculiar degree
and increasingly since the fuller development of
the machine industry has brought about a close-
knit and wide-reaching articulation of industrial
processes, and has at the same time given rise to
a dass of pecuniary experts whose business is the

•strategic management of the interstitial relations
of the system. Broadly, this class of business men,
in 80 far as they have no ulterior strategic ends to
serve, have an interest in making the disturbances
of the system large and frequent, since it is in the
^conjunctures of change that their gain emerges.
Idualifications of this proposition may be needed,
it will be necessary to return to this point
lently.

, as a business proposition, a matter of
findifference to the man of large affairs whether
I the disturbances which his transactions set up ii
i industrial system help or binder the system

' in H

at 1

:J0 THK THEORY OF BUSINESS E>-TEriPRrSE

! large, except in so far as he has ulterior strategic
I ends to serve. But most of the modem captains
of industry have such ulterior ends, and of the
greater ones among them this is peculiarly true.
Indeed, it is this work of far-reaching business
strategy that gives them full title to the d&signa-
- tion, *' Captains of Industry." This large business
strategy is thi most admirable trait of the gi-eat
business men who with force and insight swing the
fortunes of civilized mankind. And due qualifica-
tion is accordingly to be entered in the broad state-
ment made above. The captain's strategy is
commonly directed to gaining control of some
large portion of the industrial system. When
such control has been achieved, it may be to his
interest to make and maintain business conditions
which shall facilitate the smooth and efficient
working of what has come under his control, in
case he continues to hold a large interest in it as
an investor ; for, other things equal, the gains
from what has come under his hands permanently
in the way of industrial plant are greater the
liigher and more uninterrupted its industrial
efficiency.

An appreciable portion of tlie larger transactions
in railway and " industrial " properties, e.g.^ are
carried out with a view to the permanent owner-
ship of the properties by the business men into
whose hands they pass. But also in a large pro-

■bU!

BUSINESS ENTERPRISE

portion of these traii,sactions the business men's
endeavors are directed to a temporary control of
the properties in order to close out at an advance
or to gain some indirect advantage ; that is to say,
the transactions have a strategic purpose. The
isiness man aims to gain control of a given block
if industrial equipment — as, e.g., given railway
lines or iron mills that are strategically important
— as a basis for further transactions out of which
gain is expected. In such a case his efforts are
directed, not to maintaining the permanent effi-
ciency of the industrial equipment, but to influ-
encing the tone of the market for the time being,
the apprehensions of other large operators, or the
transient faith of investors.' His interest in the
particular block of industrial equipment is, then,
altogether transient, and while it lasts it is of a

tititious character.
The exigencies of thi.s business of interstitial
uiatuxbance decide that in the common run of
cases the proximate aim of the business man is to

upset or block the industrial process at some one or
more points. His strategy is commonly directed'
against other business interests and his ends are

H ' Cf. teatimony of J, B. Dill. Beport nfthf Induftn'al Commiitiimt

Pm. 1. pp. 1078, 1080-1086 ; '• Digest of Evideuce," p. 77 ; alw teaUmony

of vuioua wilnesseB on ntock aiicculaLion and corporate managenieDt,

uid pftrtlcnUrly the eprciftl report to the Comnilssian, on ■' Becnrltiei

of Indiuliiftl OombiDsUoue and Kailroiulti," vol. XIII., especially pp.

Sli THE THEORY OF BUSINESS ENTERPRISE

commonly accomplished by the help of some fonn
of pecuniary coercion. This is not uniformly tjfni
but it seems to be true in appreciably more thj
half of the transactions in question. In general,
transactions which aim to bring a coalition of
industrial plants or processes under the control
of a given business man are directed to making it
difficult for the plants or processes in question to
- be carried on in severalty by their previous owners
or managers.' It is commonly a struggle between
rival business men, and more often than not the
outcome of the struggle depends on which side can
inflict or endure the greater pecuniary damage.
And pecuniary damage in such a case not uncom-
monly involves a setrback to the industrial plants
concerned and a derangement, more or less exten-
sive, of the industrial system at large.

The work of the greater modem business men,
in so far as they have to do with the ordering of
the scheme of industrial life, is of this strategic
character. The dispositions which they make, are

■ The history of the formation of any one of the gteat industrial
coalitions of modem times nill show bow great and iiidispensable t,
factor in tbe large buaineas ia the invention and organization of diffl-
culties designed Co force rival enterprises to come to terms. E.g. the
mancsuvrea preliminary to the fonnalion of tlie United States Steel
Corporation, partiooiarly the movements of the Carnegie Company,
show how this works on a large scale. Ct. S. 6. Meade, TriM
Fiaancf, pp. 204-217 ; Seport 0/ the tndtigtrial Commission, vol. XUl.,
"Review of Evidence," pp. v-vli, wlUi the lesUmony relating to
this topie, The pressnre which brings about a new adjustment (ooali-
lion) is common^ epokea of as " exoesaive eomfetltloD."

rm J

BUSINESS ENTEKPRISK

business transactions, " deals," as they are called
in the business jargon borrowed from gaming slang.
Theae do not always involve coercion of the oppos-
ing interests ; it is not always necessary to '* put a
maji in a hole " before he is willing to "come in
"deal." It may often be that the several
parties whose business interests touch one another
will each see hus interest in reaching an amicable
and speedy arrangement ; but the interval that
dapses between the time when a given " deal " is
•een to be advantageous to one of the parties con-
cerned and the time when the terms are finally
arranged is commonly occupied with business ma-
noeuvres on both or all sides, intended to "bring
the others to terms." In so playing for position
and endeavoring to secure the largest advantage
possible, the manager of such a campaign of reor-
ganization not infrequently aims to " freeze out "
a rival or t^ put a rival's industrial enterprise
nnder suspicion of insolvency and " uiLsoimd
methods," at the same time that be "puts up a
bluff" and manages his own concern with a view
to a transient effect on the opinions of the business
community. Where these endeavors occur, du-ected
to a transient derangement of a rival's business or
to a transient, perhaps specious, exhibition of
industrial capacity and earning power on the part
of one's own concern, they are commonly detri-
mental to the industrial system at large ; they act

31 THE THEORY OF BUSINESS ENTERPRISE

temporarily to lower the aggregate serviceability
of the comprehensive industrial process within
which their effects run, and to make the livelihood
and the peace of mind of those involved in these
industries more precarious than they would be in
the absence of such disturbances. If one is to
believe any appreciable proportion of what passes
current as information on thia head, in print and
by word of mouth, business men whose work ia not
simply routine constantly give some attention to
manoeuvring of this kind and to the discovery of
new opportimities for putting their competitors at
a disadvantage. This seems to apply in a peculiar
degree, if not chiefly, to those classes of business
men whose operations have to do with railways
and the class of securities called " industrials."
Taking the industrial process as a whole, it is safe
to say that at no time is it free from derangements
of this character in any of the main branches of
modem industry. This chronic state of perturba-
tion is incident to the management of industry by
business methods and is unavoidable under exist-
ing conditions. So soon as the machine industry
had developed to large proportions, it became
unavoidable, in the nature of the case, that the
business men in whose hands lies the conduct of
affairs should play at cross-purposes and endeavor
to derange industry. But clironic perturbation
is so much a matter of coui-ae and prevails with so

BUSINESS KXTEKl'RISE

rare interruptions, that, being the normal state of
affairs, it does not attract particular notice.

V In current discussion of business, indeed ever
since the relation of business men to the industrial
system has seriously engaged the attention of
economists, the point to which attention has chiefly
been directed is the business man's work as an /
organizer of comprehensive industrial processes./'
[ the later decades of the nineteenth centuiy,
rticularly, has much interest centred, as there
been much provocation for its doing, on the
ation of large industrial consolidations; and
"the evident good effects of this work in the way of
heightened serviceability and economies of produc-
tion are pointed to as the chief and characteristic
end of this work of reorganization. So obvious
are these good results and so well and widely has
the matter been expounded, theoretically, that it is
not only permissible, but it is a point of conscience,
to shorten this tale by passing over these good
effects as a matter of common notoriety. But there
are other features of the case, less obtrusive and
less attractive to the theoreticians, which need more
detailed attention than theyhave commonly received.
The circumstances which condition the work of
consolidation in industry and which decide whether
a given move in the direction of a closer and wider
;anization of industiial processes will be practi-

3() THE THEOKY OF BUSINESS ENTElll'RISE

cable and will result in economies of production,
— these circumstances are of a mechanical nature.
They are facts of the comprehensive machine pro-
cesH. The conditions favorable to industrial con-
solidation on these grounds are not created hy the
business men. They are matters of " the state of
industrial ai-ts," and are the outcome of the work
of those men who are engaged in the industrial
employments rather than of those who are occupied
with business affairs. The inventors, engineers,
experts, or whatever name be applied to the com-
prehensive class that does the intellectual work
involved in the modern machine industry, must
prepare the way for the man of pecuniary affairs
by making possible and putting in evidence the
economies and other advantages that wUl follow
from a prospective consolidation.

But it is not enougli that the business man
should see a chance to effect economies of production
and to heighten the efficiency of industry by a new
combuiation. Conditions favorable to consolida-
tion on these grounds must be visible to him before
he can make the decisive business arrangements ;
but these conditions, taken by themselves, do not
move him. The motives of the business man are
pecuniary motives, inducements in the way of
pecimiary gain to him or to the business enterprlie
with which he is identified. The end of his
endeavors is, not simply to effect an industrial!}!!

II BUSIKESS ENTEKPIUSE 37

jidvantageous consolidation, but to effect it under
Foch circumstances of ownership as will give him
control of large business forces or bring him the
largest possible gain. The ulterior end sought isN J
an increase of ownership, not industrial servic^J
ability. His aim is to contrive a consolidation in
which he will be at an advantage, and to effect it
on the terms most favorable to his own interest.

But it is not commonly evident at the outset
what are the most favorable terms that he can get
to his dealings with other business men whose
interests are touched by the proposed consolidation,
or who are aimbitious to eSect some similar con-
solidation of the same or of competing industrial
elements for their own profit. It rarely happens
that the interests of the business men whom the
prospective consolidation touches all converge to a
coalition on the same basis and under the same
management. The consequence is negotiation and
delay. It commonly also happens that some of the
business men affected see their advantage in stav-
ing off the coalition until a time more propitious
to their own interest, or until those who have the
work of consolidation in hand can be brought to
compound with them for the witlidrawal of what-
ever obstruction they are able to offer.' Such a
coalition involves a loss of independent standing,

. ' C(., e-ff., Ihe acconnte of '.he ffirmntion of llie United StattB Stfcl
ir of llie SliijiLuililiiij.' Oiiiipaiiy.

38 THE THEOKV OF BUSINESS ENTERPRISE

or even a loss of occupation, to many of the
business men interested in the deal. If a pros-
pective industrial consolidation is of such scope as
to require the concurrence or consent of many
business interests, among which no one is very
decidedly prc^wnderant in pecuniary strength or in
strategic position, a long time will be consumed in
the negotiations and strategy necessary to define
the terms on which the several business interests
will consent to come in and the degree of sohdarity
and central control to which they will submit.

It is notorious, beyond the need of specific cita-
tion, that the great business coalitions and indus-
trial combinations which have characterized the
situation of the last few years have commonly
been the outcome of a long-drawn sti-uggle, in
which the industrial ends, as contrasted with
business ends, have not been seriously considered,
and in which great shrewdness and tenacity have
commonly been shown in the staving oS of a set-
tlement for years in the hope of more advantageous
terms. The like is true as regards further coali-
tions, further consolidations of industrial processes
which have not been effected, but which are known
to be feasible and desirable so far as regards the
mechanical circumstances of the case. The difficuP^
ties in the way are difficulties of ownership, of>
business interest, not of mechanical feasibility;/

Tliese negotiations and much of tbe strategy

BUSINESS E>'TERPEISE

^Hthat leads up to a busiuess consolidation are of
the nature of deraugements of induatry, after the
manner spoken of above. So that business inter-
ests and manceuvres commonly delay consolida-
tions, combinations, correlations of the several '
nts and processes, for some appreciable time
: such measures have become patently advis-
ijon industrial grounds. In the meantime the
iators are working at cross-purposes and
endeavoring to put their rivals in as disadvan-
tageous a light as may be, with the result that
there is chronic derangement, duplication, and
misdirected growth of the industrial equipment
while the strategy is going forward, and expensive
maladjustment to be overcome when the negotia-

^^tkms are brought to a close.'

^H Serviceabihty, industrial advisability, is not the |

^^Necisive point. The decisive point is business |
expediency and business pressure. In the normal
course of business touching this matter of indus-
trial consolidation, therefore, the captain of indus-
try works against, as well as for, a new and more
efficient organization. He inhibits as well as fur-
thers the higher organization of industry." Broadly,

1 Wlmess Uie rale wars and the duptitatioiiH o[ inefficiunt irack and
lanniDftl equipmeut among the roilwayH, anit llie Bimilar duplicatioiiH
in die inn and steel indiutry. Tbe nyslein of railwn; lerininals in
ClUeagO. e-tf., ia an illuminated ubject-lessau of systeinaUc ineptitude.

•The splendid rcacli of tliiK inliitiilory work of the captain nf
indiutrjr, a« well as of his aggressive work of cuiiaolidnUon, is wi'U
ahowD, for instance, in the hl^itorj and preoeut poeiClou uf the ruil»!iy

40 THE THEORY OF BUSINESS ENTERPRISE

it may be said that industrial cousolidationa and
the working arrangements made for the more

industry iu America. It is and has tor a long term of years been
obvious that a very comprehensive uuiflcatiou or consolidation, in
respect of the meclianical vrork to be doue by the railway system, is
eminently desirable aud fensible, — cuaaolidation of & scope not only
eqaalling, but far ontreHching, the coalitions which have lately been
effected or attempted. There is no hazard in venturing the asGerUon
thai several hundreds of men who are engaged in tbe meclianicul work
i>f railroading, in one capacity and another, are conventant with fea-
sible plans for economising work and improving tbe service by more
oompreliensive and closer correlation of the work; and it is equally
obvious that nothing but the diverging interests of the business men
concerned hinders these closer and larger feasible correlations from
twing put into effect. It is easily within the mark to say that the
delay which railway consolidation has suffered up to the present, from
business exigencies ae dialinct from the mechanical circumstances of
the case, amounts to an average of at least twenty years. Ever since
railroading began in this country there has been going on a process of
reluctant Consolidation, in which the movemeola of the bu^ess men
in control have tardily followed up the opportunities for economy and
efficient service which the railroad industry has offered. And their
latest and boldest achievements along this line, as seen from the stand-
point of mechanical advisability, have been foregone conclusions since
a date no far in the past as to be forgotten, and taken at their best
they fall short to-day by not less than some fifty per cent, of their
opportunities. C(, Report of the Industrial Commitnion, vol. XIX,.
" Transportation," especially pp. 30i-348.

Like other competitive busIiieBs, but more particularly such busi-
ness as has to do with tbo interstitial adjustments of the indnstrial
system, the business of railway consolidation is of tbe nature of a
game, in which the end sought by the players is their own pecuniary
gain and to which the industrial serviceability of the outcome is inci-
dental only. This is recognized by popular opinion and is made much
of by popular agitators, who take the view that when once the game
between the competing hUHlness interests has been played to a finish,
in the definitive coalition of the competitors under one management,
then the game will go on as a somewhat one-sided conflict between the
resulting monopoly and the community at large.

So again, as a further iliustr.ttion, it is and from the outset has
been evident that the iron-ore beds of northern Wisconsin, Michigan,
and Minnesota ought, industrially speaking, to have been worknl n<i
line ritllective enterprise. There are also none but biisi]ie<» reitAons

BUSINESS ENTKBPBISE

economical utilization of resources and mechanical
contrivances are allowed to go into effect only
after they are long overdue.

In current economic theory the business man is
spoken of under the name of "entrepreneur" or
"undertaker," and his function is held to be the
coordinating of industrial processes with a view to
economics of production and heightened service-

questioned. It has a great seuliiiifiniaL value and is
useful in many ways. There is also a mo dicum of
truth in it as an account of facts. In common with f
other men, the busmess man is moved by ideals of
serviceability and an aspiration to make the way of
life easier for his fellows. Like other men, he has'
something of the instinct of workmanship. Nodoubt
BUch aspirations move the great business man less
urgently than many others, who are, on that account,
less successful in business affairs. Motives of this
kind detract from business efficiency, and an undue
yielding to them on the part of business men is to be
deprecated as an infirmity. Still, throughout men's

•why piactically all tha ore beds and itoa and steel works in the coun-
try ue not worked m one collective enterprise. It is equally evident
thti ancb correlations of work aa are permitted by tbe business coali-
lions jUready eSecud in this field have resulted In a great ecoiiomj of
pTodactloo, and that the failure to carry tlieae conlitions farther means
an annual waste running up into the millions. Both the ecoaomiea so
effected and the waste so incurred are to be set down to tbe account
of tlie boeiness roanageni who have gone so far and have failed to go
Innher. Tbe like Is obvioiis as regards many other branches of
industry mid groups ol industries.

42 THK THEORY OF HUSINESS E^'TEKPRISE

dealings with one another and with the interests of
the community there runs a sense of equity, fair deal-
ing, and workmanlike integrity ; and in an uncertain
degree this hent discountenances gain that is got at
an undue coat to others, or without rendering some
colorable equivalent. Business men are also, in a
measure, guided by the ambition to effect a credit-
able improvement in the industrial processes which
their business traffic touches. These sentimental
factors in business exercise something of a con-
straint, varying greatly from one person to another,
but not measurable in its aggregate results. The
careers of most of tlie illustrious business men
show the presence of some salutary constraint of
this kind. Not infrequently an excessive sensi-
tiveness of this kind leads to a withdrawal from
business, or from certain forms of business which
may appeal to a vivid fancy as jjeculiarly dishonest
or peculiarly detrimental to the community.' Such

' Uluslratire iustaiiceB will reailily auggesi UieuiselveB, Huiy «
bnsinees man turos by preference to something less dubioua than lbs
distilUng of mhUltey or tUe sale ot deleterious hoiisebold remedies.
They prefer not to use deleterious adulterants, even within the limits
of the law. They nil! rather uae wool than shoddy at the some price.
The officials of a r&ilwuy commonly prefer to avoid nrecks and nun-
slaughter, even if there is no i>ecuniary advantage in choosing tha
more humane course. More than that, it will be found true that Iha
more prosperous of the ci-aft, cBpeclally, lake pride and pains to
make the seraee of llieir roads or the output of their mills as efllcient,
not simply as the pecuniary advantage of tlie concern demands, but
B9 tbe best pecuniary i-eeulls will admit. Instances are perhaps not
frequent, but Iney are also not altogether cxneptional, where a pros-
perous captain of indusiry will gn out of Lis way to heighten the

grounds of action, and perhaps others equally

^^enial and equally itnbusinesslike, would probably

^^Be discovered by a detailed scnitiuy of any large

^Htusiuess deal. Probably in many cases the business

^^vat^ist, infected with thb human infinnity,

^HwcheB an agreement with his rivals and his

neighboifi in the industrial system without exacts

iug the last concession that a ruthless business

strategy might entitle hiai to. The result is,

probably, a speedier conclusion and a smoother

working of the large coalitions than would

follow from the unmitigated sway of business

principles.'

But the sentiment which in this way acts in

constraint of business traffic proceeds on such

grounds of er^uity and fair dealing as are afforded

by cturent business ethics ; it acts within the

range of business principles, not in contravention

of them ; it acts as a conventional restraint upon

pecuniary advantage, not in abrogation of it.

_ This code of business ethics consists, after all.

^npf mitigations of the maxim. Caveat emptor. It

^^WDchea primarily the dealings of man with man.

wrficeabillly of liis induatrj even to ti degree thai is of doubtful
peetiniary expediency for himself. Such aberrations are, ol course,
not luge ; and if they are persisted in lo any very appreciablu extern
^le Kault is, of course, dlsaslroua to tbe euterprise. Tlje ealerptige

cue falls out of the category of busiaosB management ami

a* tbe impulatlon of pliilftntbropy.

eaptaiiia of the iirsl c-lnss necessarily are relnlivcly exempL -

e uubilsiiicaslllit &.riijiti>s.

44 THE THEORY OF BUSINESS ENTERPRISE

and only leBS directly and less searcluDgly incul-
cates temperance and circumspection as regards
the ulterior interests of the community at large.
Where this moral need of a balance between the
services rendered the community and the gain
derived from a given business transaction asserts
itself at all, the balance is commonly sought to
be maintained in some sort of pecuniary terms;
but pecuniary terms afford only a very inadequate
measure of serviceability to the community.

Great and many are the items of service to be
set down to the business man's account in connec-
tion with the organization of the industrial system,
but when all is said, it is wtill to be kept in mind
that his work in the correlation of industrial pro-

1/ cesses is chiefly of a permissive kind. His further^
ance of industry is at the second remove, and is
chiefly of a negative character. In his capacity
as business man be does not go creatively into the
work of perfecting mechanical processes and turn-
ing the means at hand to new or larger uses. That
is the work of the men who have in hand the
devising and oversight of mechanical prooesaes.

/ The men in industry must first create the mechani-
cal possibility of such new and more efficient
methods and correlations, before the business man
sees the chance, makes the necessary business
arrangements, and gives general directions that
the contemplated industrial advance shall go into

sees the
arrangem

BUSINESS KNTERPRISE

eiEect. The period between the time of earliest
practicability and the effectual completion of a
given consolidation in industry marks the interval
by which the business man retards the advance
of industry. Against this are to be offset the cases,
comparatively slight and infrequent, where the
business men in control push the advance of
industry into new fields and prompt the men con-
cerned with the mechanics of the case to experi-
ment and exploration in new fields of mechanical
jffoceas.

When the recital is made, therefore, of how the

large consolidations take place at the initiative

of the business men who are in control, it should

be added that the fact of their being in control

precludes industrial correlations from taking

^la<!e except by their advice and consent. The"

industrial system is organized on business prin-

Kciples and for pecuniary ends. The business man

lis at the centre; he holds the discretion and he

lexerciaes it freely, and his choice falls out now

I one side, now on the other. The retardation

I well as the advance is to be set down to his

nt.

As regards the economies in cost of production
' effected by these consolidations, there is a fur-
ther characteristic feature to be noted, a feature
of some significance for any theory of modern
Ibuainess. In great measure tlie saving effected

THE XJIEOEY OF BUSINESS EMTKRPRISK

is a saving of the costs of business management
and of the competitive costs of marltethig products

/ and services, rather than a saving in the prime
costs of production. The heightened facihty and
efficiency of the new and larger business combina-
tions primarily affect the expenses of office work
and sales, and it is in great part only indirectly
that this curtailment and consolidation of business
management has an effect upon the methods and
aims of industry proper. It touches the pecuniary
processes immediately, and the mechanical pro-
cesses indirectly and in an uncertain degree. It is
of the nature of a partial neutralization of the
wastes due to the presence of pecuniary motives
and business management, — for the business man-
agement involves waste wherever a greater number
of men or transactions are involved than are
necessary to the effective direction of the mechani-
cal pTOceaae.>j employed. The amount of " business "
tliat has to be transacted per unit of product is
much greater where the various related industrial
processes are managed in severalty than where
several of them are brought imder one business
management. A pecuniary discretion has to be
exercised at every point of contact or transition,
where the process or its product touches or passes
the boundary between different spheres of ownei^
ship. Business transactions have to do with

' ownership and changes of ownership. The greater

the parcelnient iu ptjint of ownership, the greater
the amouBt of business work that has to be done
ijn connection with a given output of goods or I
■•ervices, and the alower, tesa facile, and less ac-
curate, on the whole, is the work. This applies I
both to the work of bargain and contract, wherein
pecuniary initiative and discretion are chiefly ex-
ercised, and to the routine work of accounting,
and of gathering and applying information and
linfomiation.

The Btandardizatiou of industrial processes, prod-
services, and consumers, spoken of in an
earlier chapter, very materially facilitates the
business man's work in reorganizing business
enterprises on a larger scale ; particularly does
this standardization serve his ends by permitting
a uniform routine in accounting, invoices, con-
tents, etc., and so admitting a large central ac-
counting system, with homogeneous ramifications,
Bucb as will give a competent conspectus of the
jary situation of the enterprise at any given

ana
^K^Biain
^^Tfa

^^CtB,

p ecunii
^Bime.
^1 The

The great, at the present stage of development
perhaps the greatest, opportunity for saving by
oonBolidatioii, in the common run of cases, is
irded by the ubiquitous and in a sense excessive
of business enterpri.se in the economic
It is in doing away with unnecessary^
transactions and industrially futile ma-\

48 THE THEORV OF BUSINESS

noeuvring on the part of independent firms that
the promoter of combinationa finds his most tell-
ing opportunity. So that it is scarcely an over^
statement to say that probably the largest, assuredly
the securest and moat unquestionable, service ren-
dered by the great modem captains of industry
is this curtailment of the business to be done, —
this sweeping retirement of business men as a
class from the service and the definitive caneel-
ment of opportunities for private enterprise.

So long as related industrial units are under
different business managements, they are, by the
nature of the case, at cross-piu-posea, and business
consolidation remedies this untoward feature of
the industrial system by eliminating the pecun-
iary element from the interstices of the system
as far as may be. The interstitial adjustments
of the industrial system at large are in this way
withdrawn from the discretion of rival business
men, and the work of pecuniary management pre-
viously involved is in large part dispensed with,
with the result that there is a saving of work
and an avoidance of that systematic mutual hin-
drance that characterizes the competitive manage-
• ment of industry. To the community at large
the work of pecuniary management, it appears,
is less serviceable the more there is of it. The
heroic_r31e of the captain of industry is that of
a dehverer from an excess of business manage-

meat. It is a casting out of business men by
chief of business men.'

Bens

^Hlioi

The theory of business enterprise sketched above
applies to such business as is occupied with the
interstitial adjustuients of the system of industries.
This work of keeping and of disturbing the inter- ,
stitial adjustments does not look immediately to
the output of goods as its source of gain, but to
the alterations of values involved in disturbances
of the balance, and to the achievement of a more
favorable business situation for some of the enter-
prises engaged. This work lies in the middle,
between commercial enterprise proper, on the one
hand, and industrial enterprise in the stricter
sense, on the other hand. It is directed to the '

[uisition of gain through taking advant-age of '

lose conjunctures of business that arise out of the]

Wicatenation of processes in the industrial system.

In a similar manner commercial business may
be said to be occupied with conjunctures that
arise out of the circumstances of the industrial
system at large, but not originating in the mechan-
ical exigencies of the industrial processes. The
conjunctures of commercial business proper are

the main fortuitous, in so far that they are

Bee Report of the Industrial Commiisifin. vol. I., Testimony of
IT. Q&tes, pp. 102l>-103fl ; S. Dodd, pp. 104B-105O ; N. B. Rogers, p.
; toI. XIII.. C. M. Schwab, pp. 451, iSf ; H. B. Butler, p. 100 ;
. EopkiDJi, pp. 34C, 347 ; A. S. Wkiw, pp. 254, 2».

Tin: THEOKV OF iu'siNi:^;s

commonly not initiated by the business men en-
gaged in these commercial pursuits. Comraerciiil
business, simply as Biich, does not aim tu guide
the course of industry.

On the other liand, the large business ente!>
prise spoken of above initiates changes in indus-
trial organization and seeks ltd gain in large part
through such alterations of value levels as take
place on its own initiative. These alterations of
the value levels, of course, have their effect upon
the output of goods and upon the material wel-
fare of the community ; but the effect which they
have in this way Ls only incidental to the quest of
profits.

But apart from this remoter and larger guidance
of the course of industry, the business men also,
and more peraistently and pervasively, exercise
a guidance over the course of industry in detail.
The production of goods and services is carried
on for gain, and tlie output of goods is controUed
by business men with a Wew to gain. Commonly,
in ordinary routiue business, the gains come
from this output of goods and services. By the
sale of the output the business man in industry
" realizes " his gains. To " realize" means to
convert salable goods into money values. Tha
sale is the last step in the process and the end N
of the business man's endeavor.' When he has

' Ct. Marx, Kapical, bk. I. pt. 11.

ESS ENTKEI'RISK

ili-sposed of the output, and bo has converted his
holdings of consumable articles into money values,
his gains are as nearly secure and definitive aa the
circum8tance3 of modern life admit. It is in
terms of price that he keeps his accounts, and in
the same terms he computes his output of prod-
acts. The vital point of production with him
is the vendibility of the output, its convertibility
into money values, not its serviceability for the
needs of mankind. A modicum of serviceability,
for some purpose or other, the output must have
if it is to be salable. But it does not follow ,
[that the highest serviceability gives the largest ,
gains to the business man in terms of money, nor
does it follow that the output need in all cases
have other than a factitious serviceability. There
on the one hand, such a possibility as over-
ing the market with any given line of goods,
to the detriment of the business man concerned,
but not necessarily to tlie immediate disadvan-
tage of the body of consumers. And there are,
the other Land, certain lines of industry, such
many advertising enterprises, the output of
which may be highly effective for its purpose
but of quite equivocal use to the community.
Many well-known and prosperous enterprises which
advertise and sell patent medicines and other
proprietary articles might be cited in proof.
In the older days, when handicraft was the rule

nave
^b, on
^BjMocki

^K In the c

o2 THE THEORY OF bUSL\

of the industrial syatem, the personal contact be-
tween the producer and hia customer was some-
what close and lasting. Under these circumstances
the factor of personal esteem and disesteem had a
considerable play in controlling the purveyors of
goods and services. This factor of personal con-
tact counted in two divergent ways: (1) producers
were careful of their reputation for workmanship,
even apart from the gains which such a reputation
might bring ; and (2) a degree of irritation and ill-
will would arise in many cases, leading to petty
trade quarrels and discriminations on other grounds
than the gains to be got, at the same time that the
detail character of dealings between producer and
consumer admitted a degree of petty knavery and
huckstering J,hat is no longer practicable in the
current large-scale business dealings. Of these two
divergent effects resulting from close personal re-
lations between producer and consumer the former
seems on the whole to have been of preponderant
consequence. Under the system of handicraft and
neighborhood industry, the adage that " Honesty is
the best policy" seems on the whole to have been
accepted and to have been true. This adage has
come down from the days before the machine's
regime and before modern business enterprise.

Under modem circumstances, where industry is
carried on on a large scale, the discretionary head
of an industrial enterprise is commonly removed

— , i

from all personal contact with the body of cus-
tomers for whom the industrial process under his
control purveys goods or services. The mitigating
effect which personal contact may have in dealings
between man and man is therefore in great meas-
ure eliminated. The whole takes on .something of
im|)er8onal charaeter. I One can with an easier
inscience and with less of a sense of meannesa
e advantage of the necessities of people whom
one knows of only as an indiscriminate aggregate
of consumers. \ Particularly is this true when, as
frequently happens in the modem situation, thia
body of consumers belongs in the main to another,
inferior class, so that personal contact and cogni-
zance of them is not only not contemplated, but is
in a sense impossible. Equity, in excess of the
formal modicum specified by law, does not so
readily assert its claims where the relations between
le parties are remote and impersonal as where
le is dealing with one's necessitous neighbors who
'e on the same social plane. Under these cir-
itancea the adage cited above loses much of its
iomatic force. Business management has a
ice to proceed on a temperate and sagacious
klculation of profit and loss, untroubled by senti-
lental considerations of human kindness or irrita-
tion or of honesty.

The broad principle which guides producers and
lercbants, large and small, in fixing the prices at

54 THE THEORY OF BUSIM

which they offer their wares and services is what is
known in the language of the railroads as " charg-
ing what the traffic will bear." ' Where a given
enterprise has a strict monopoly of the supply of a
given article or of a given class of services this prin-
ciple applic' in the imqualihed form in which it has
been understood among those who discuss railway
charges. But where the monopoly is less strict,
where there are competitors, there the competition
that has to be met is one of the factors to be taken
account of in determining what the traffic will bear ;
competition may even become the most serious factor
in the case if the enterprise in question has little or
none of the character of a raoiiopoly. But it is
f very doubtful if there are any successful business
ventures within the range of the modern industries
from which the monopoly element is wholly absent."
They are, at any rate, few and not of great magni-
tude. And the endeavor of all such enterprises that
look to a permanent continuance of their business
is to establish as much of a monopoly as may be.

■ Tlie ccouomlc principle of " charging what the traffic will bear "
]& diHCUBsed wilh great care and eLaboratioa by R. T. Elj, llonopolitt
ind Trusts, ch. HI., "The Law of Monopoly Prioe." Cf., for illus-
tration of the practical woTking of thia principle, teitUiiiDny of C. M.
Sohnab, JiepoTt of the Industrial Commission, vol Xtll. pp. KZ-iOEi.

* " Monopoly " is here lued in that looser sense which it has col-
loquially, not in the rtrict eenee of an «xclut«ive control of the Ropply,
as employed, e.g. , by Mr. Ely in the volume cited above. This uoage
is t^e more excusable .since Mr. Ely flnds that a " monopoly " in tli»
strict Hense ot Lbf dciinillMM practically does not occur in fact. Cf.
Jenks, Tie Trust Prublem, ch. IV.

ENTERPEISE

Sucli fi monopoly position may be a legally estab-
^—Jiahed one, or one due to location or the control of
^^■atural resources, or it may be a monopoly of a
^^Kss definite character resting on custom and
^^n^stige (good-will). This latter class of monopolieB
^^pre not commonly classed as such ; although in
character and degree the advantage which they
give is very much the same as that due to a differ-
ential advantage in location or in the command of
resources. The end sought by the systematic
advertising of the larger business concerns is such
a monopoly of custom and prestige. This form of
monopoly is sometimes of great value, and ia fre-
quently sold under the name of good-will, trade-
marks^ brands, etc. Instances are known where
such monopolies of custom, prestige, prejudice, have
been sold at prices running up into the millions.'

The great end of consistent advertising is tO'
aitablifih such differential monopolies resting on
popular conviction. And the advertiser is success-
ful in this endeavor to establish a profitable
popular conviction, somewhat in proportion as he
correctly apprehends the manner in which a popu-
lar conviction on any given topic is built up.* The

' E.g. Ihe preatigo value of Ivory Soap.

» Cf. W. D. Scott, Thf Theory of AdverlUing ; J. L. Mahin, TTie

iwmtrttal Vahif. of AdBprtUtii'j, pp. i-O, 12-13, 16; E. Fogg-Hesde,

,« Place of AilTertiaing in Mwiern Bosiueas," Journal of Politieal

tOTWmv, March ItNll ; Souibart, vol. II. ch. XX.-XXI.; 0. Tttrde,

U>gie Ee^noraique, vol. I. pp. l&T-ino. Tlie writing and ili

J lulTertiseiiienta (leiterpresa, display, and illuBlratione) hi

56 THE THEOKi' OF BUSIM.

cost, as well aa the pecimiarj value aud the mag-
nitude, of this organized fabrication of popular

grown into a distinct calling ; eo thai the work of a skilled writer of
adverliaeinBnls compareH not uofavorably, in point of lucrativeneas,
with tiat of the avowed writers of popular fiction.

ThB psychological principles of advertising may be fonnulaled
Bomenbat as follows : A declaration of fact, made in the form and with
the incidents of tasle and eipression to which a person is aooiialomed,
will be accepted as authentic and will be acted upon if occasion ariseB,
in so far as it does not conflict with opinions already accepted. The
aoceptouce o( an opinion seems to be almost entirely a passive matter.
The presumption remains in favor of an opinion that has once been
accepted, and an appreciable burdeu of proof falls on the negative.
A Cflmpetent formulation of opinion on a given point is the chief
factor in gaining sdherenu to that opinion, and a reiteration of the
statement is the chief factor in carrying conviction. The truth of
such a formulation is a matter of secondary consequence, but a wide
and patent departure from known fact generally weakens its per-
Buasivo eSect. The aim of the advertiser is to arrest attention and
then present his statement in such a manner that it is easily assimi-
lated into the habits of thought of the person whose conviction is to
be influenced. When this is eSectually done a reversal of the con-
viction so established is a matter of coiuiiderable difficulty. The
tenacity of a view once acceplad in this way is evidenced, for Itkstance,
by the ctidless number and variety of testimonials to the merits of wetl-
advertised bat notoriously worthless household remedies and the like.

So acute an observer as Mr. Sombart is sHll able to hold the
opinion that " auf Schwlndel ist dauemd nocb nle ein Unternehmen
begrllndet worden" (KapUaluitnug, vol. 11. p. 378). Mr. Sombart
has not made acquaintance with the adventures of Elijah the Re-
storer, nor la he conversant with American patent-medicine enter-
prise. With Mr. Sombart's view may be contrasted that of Mr.
L. F. Ward, an observer of equally large outlook and amimen : —

"The law of mind as it operates in society as an aid to competi-
tion and in the Interest of the individual is essentially Immoral. It
reets primarily on the principle of deception. It is an eztenaion to
other human beings of the method applied to the animal world by
which the latter was subjected to man, This method was that of the
ambush and the snare. lu ruling principle was cunning. Its object
was to deceive, circumvent, ensnare, and capture. Low animal cun-
ning was succeeded by more reilued kinds of cunning. The more
important of Lhese go by the niinitj i>f business stirewdncsa, strategy,

eonvictiona is indicated by such statements as that
the proprietors of a certain well-known household
remedy, reputed among medical authorities to be
of entirely dubious value, have for a series of
years found their profits in spending several mill-
ion dollars annually in advertisements. This case is
by no means miique.

It has been said,' no doubt in good faith and
certainly with some reason, that advertising as
corrently carried ou gives the body of consumers
valuable information and guidance as to the ways
and means whereby their wants can be satisfied
and their purchasing power can be best utihzed.
To the extent to which this holds true, advertising
is a service to the community. But there is a
large reservation to be made on this head. Adver-
tising is competitive ; the greater part of it aims
to divert purchases, etc., from one channel to
another channel of the same general class.' And
to the extent to which the efforts of advertising in
all its branches are spent on this competitive
disturbance of trade, they are, on the whole, of

■ad diplomacy, none ai which differ from ordinary cunniiig in aay-
Vaing bat the degree of fidroitness by which the viclim is oaiwitted,
la this way social life is completely honeycombed with deception." —
"The Psychologic Baala of Social Ecotioinics," Aati. of Am, Acad.,
toL m. pp. 83^*1 [47fr-478].

'Fo^-Meade, "Place of AdTsrlising in Modem BoBinen," pp.
218, 224-236.

■Advertising and other like expedients for the sale of goods aim st
n the " subalitntidn values" of tliegooAiinqnestion, not at an
Dent of the aggregate utilities of the available output of goods.

58 THE THEORY OF HUSINE8S^

slight if any immediate service to the community.
Such advertising, however, is indispensable to
most branches of modern industry ; bnt the ne-
cessity of most of the advertising is not due to its
serving the needs of the community nor to any
aggregate advantage accruing to the concerns
which advertise, but to the fact that a business
concern which falls short in advertising fails to
get its share of trade. Each concern must adver-
tise, chiefly because the others do. The aggregate
expenditure that could advantageously be put into
adverti-sing in the absence of competition would
undoubtedly he hut an inconsiderable fraction of
what is actually incurred, and necessarily incurred
under existing circumstances.'

J Not all advertising is wholly competitive, or at
least it is not always obviously so. In proportion
aa an enterprise has secured a monopoly position,
its advertising loses the air of competitive selling
and takes on tlie character of information designed
to increase the use of its outjmt independently.
But sucli an increase implies a redistribution of
consumption on the part of the customers.' So
that the element of competitive selling is after
all not absent in these cases, hut takes the form
of competition between different classes of wares

<Cr. Jeiike, Thp Tnigt Problem, pp.21--Jg; Jlijuirt of the Induslrial
Committion, vol. XJK. pp. 01I-{I12.

' Cf. Bohn-Bnwerk, PuMivr Theorg of CapUal, bk. Itl., ch. V.,

VII.-IX,, on the valne of alternative nnil complemantary piwls.

Pushes? enterprise

instead of competitive selling of different brands of
the same class of wares.
Attention is here called to this matter of adver-
jig and the necessity of it in modern competitive
isiness for the light which it throws on " cost of
duction " in the modem system, wliere the pro-
cess of production is under the control of business
men and i3 carried on for business ends. Cora-
jietitive advertising is an unavoidable item in the
[regate costs of industry. It does not add to
I Berviceability of the output, except it be inci-
ntally and unintentionally. What it aims at ia
• Bale of the output, and it is for this purpose
iBt it is useful. It gives vendibility, which is
feful to the seller, but has no utility to the last
It« ubiquitous presence in the costs of any
business enterprise that has to do with the produc-
tion of goods for the market enforces the statement
lat the " cost of production " of commodities
lltder the modern business system is cost incurred
't'wfth a view to vendibility, not with a view to ser-
viceability of- the goods for human use. ,
There is, of course, much else that goes into the
wt of competitive selling, besides the expenses of
hrertising, although advertising may be the
largest and most unequivocal item to be set down
to that account. A great part of the work done
^^by merchants and their staff of employees, both
^^faiolcsiile ftiid retiiil, as well as by sales-agents not

KUiat
"Trfth

60 THE THEORY OF BUSINESS

exclusively connected with any one mercantile
house, belongs under the same head. Just how
large a share of the costs of the distribution of
goods fairly belongs under the rubric of competi-
tive selling can of course not be made out. It is
largest, on the whole, in the case of consumable
goods marketed in finished form for the consumer,
but there is more or less of it throughout. The
goods turned out on a large scale by the modern
industrial processes, on the whole, carry a larger
portion of such competitive costs than the goods
still produced by the old-fashioned detail methods
of handicraft and household industry ; although
this distinction does not hold hard and fast. In
some extreme cases the cost of competitive selling
may amount to more than ninety per cent, of the
total cost of the goods when they reach the con-
aimier. In other lines of business, commonly
occupied with the production of staple goods, this
constituent of cost may perhaps fall below ten per
cent, of the total. Where the average, for the
price of finished goods delivered to the consumers,
may lie would be a hazardous guess.'

It is evident that the gains which accrue from

this business of competitive selling and buying bear

' Where compelUive selling inahes up a large proportion o( Uie
aggregate Qniil cost of the umrkeled product, this (act ia like); to sboir
itself in an eioeplionally large proportion of good-will in the capitali-
zation of the coDceroH eiiRnged in the given liae o[ ba«inesa ; ox, e.g..
the Amerioui Chicle Compauy.

lUSISICSS ENTEIU'RTSE

no determinable relation to the services which the
work in question may render the community. If a
comparison may be hazarded between two unknown
and indeterminate quantities, it may perhaps be
said that the gains from competitive selling bear
something more o£ a stable relation to the service
rendered than do the gains derived from specula-
tive transactions or from the financiering opera-
tions of the great captains of industry. It seems
at least safe to say that the converse will not hold
true. Gains and services seem more widely out of
touch in the case of the large-scale financiering
work. Not that the work of the large business
men in reorganizing and consolidating the indus-
trial process is of slight consequence ; but as a
general proposition, the amount of the business
man's gains from any given transaction of this
latter class bear no traceable relation to any bene-
fit which the community may derive from the

transaction J

As to the wages paid to the men engaged in the
routine of competitive selling, as salesmen, buyer.'!,
accountants, and the like, — much the same holds
true of them as of the income of the business men
who carry on the business on their own initiative.

■ Ct. Ed. Hahn. Die WirCachafl der Welt am Ausgang ilea XIX. Jahr-

kundertt. — '• In uiiBerem heuligen Wirtachaflalebeu ist der Geninn

durch den Zuwuchs der Produktion. mlt deni frilhere Jahrbnnderte

■ nabnelen, ganz uud gar znrUckgedrlngt, er 1st unwesentlleb genor-

02 THK THEORY OF BUSINESS

Their employers pay the wages of these persons,
nut because their work is productive of beuefit to
the community, but because it brings a gain to the
employers. The point to which the work is directed
is profitable sales, and the wages are in some pro-
portion to the efficiency of this work as coimted in
terms of heightened vendibility.

The like holds true for the work and pay of the
force of workmen engaged in the industrial pro-
cesses under business management. It holds, in a
measure, of all modern industry that produces for
the market, but it holds true, in an eminent de-
gree, of those lines of industry that are more fully
under the guidance of modern bu.sines8 methods.
These are most closely in touch with the market
and are most consistently guided by considerations
of vendibility. They are also, on the whole, more
commonly can-ied on by hired labor, and the wages
paid are competitively adjusted on grounds of the
vendibility of the product. The brute serviceability
of the output of these industries may be a large
factor in its vendibility, perhaps the largest factor ;
but the fact remains that the end sought by the
business men in control is a profitable sale, and
the wages are paid as a means to that end, not
to the end tliat the way of life may be smoother
for the ultimate consumer of the goods produced.^

' It might, therefore, bo feasibto to set up a tUeory to the effect
Uiat wages ait; L'oiupetltively proportioned to tbo vendibility ol the

The outcome of this recital, then, is that wher^

ever and in so far as business ends and methods

dominate modern industry the relation between

tlie usefulness of the work (for other purposes tlian

pecuniary gain) and tlie remuneration of it is

remote and uncertain to sucU a degree that no

^jitempt at formulating such a relation is worth

^^Hlile. This is eminently and obviously true of

^Qne work and gains of business men, in wliatever

lines of business they are engaged. This follows

as a necessary consequence of the nature of busi-

^ness management.

^K Work that is, un the whole, useless or detrimental
^^n the community at large may be as gainful to
^Bb business man and to the workmen whom he
^Biploys as work that contributes substantially to
the aggregate livelihood. This seems to be pecul-
iarly true of the bolder flights of business enter-
prise^ In so far as its results are not detrimental
to human life at large, suck unp^oducti^'e work
directed to securing an income may seem to be

product ; but there is no cogent grouud for Kayinj; that the wages iti
Mijr departmeDt of industry, under a bUHiness r^iuie, are propur-
tlo&ed lo the utilit)' which the output lins to luiy one else than tbp
employer who sells it. When it ia further taken into account that
Uhe Teudibility of the product iu very many lines of production de-
pends chiefly on the wastefulness of the gooila (cf. Thrnry of thu
Lriturt Cln»», ch. V.). the divergence bnlircen the uaefulueaa of the
work and Che wages paid for it seeuis wiite enough to t^row the
whole question of an equivalence between work and pay out of Iheo-

C'ation. l?f., however, Clark, The Dittr{bWitiHt(f WtaltA,
VU. and XXIL

64 THE THEORY OF BUSINESS

an idle matter in which the rest of the community
has no substantial interests. Such is not the case.
In so far as the gains of these unproductive occu-
pations are of a substantial character, they come
out of the aggregate product of tlie other occupa-
tions in which the various classes of the commu-
nity engage. The aggregate profits of the business,
whatever its character, are drawn from the aggre-
gate output of goods and services ; and whatever
goes to the maintenance of the profits of those
who contribute nothing substantial to the output
is, of course, deducted from the income of the
others, whose work tells substantially.

There are, therefore, limits to the growth of the
industrially parasitic lines of business just spoken
of. A disproportionate growth of parasitic indus-
tries, such as most advertising and much of the
other efforts that go into competitive sellii^, as
well as warlike expenditure and other industries
directed to turning out goods for conspicuously
wasteful consumption, would lower the effective
vitality of the community to such a degree as to
jeopardize its chances of advance or even its life.
The limits which the circumstances of life impose
in this respect are of a selective character, in the last
resort. A persistent excess of parasitic and waste-
ful efforts over productive industry must bring on
a decline. But owing to the very high productive
efficiency of the modern mechanical industry, the

margin available for wasteful occupations
wasteful expenditures is very great. The require-
ments of the aggregate livelihood are so far abort
of the possible output of goods by modem methods
to leave a very wide margin for waste and para-
ic income. So that instances of such a decline,
due to industrial exhaustion, drawn from the his-
tory of any earlier phase of economic life, carry
no well-defined lesson ae to what a modem indus-
trial community may allow itself in this respect.
While it is in the nature of things unavoidable
that the management of industry by modem busi-
ness methods should involve a large misdirection
of effort and a very large waste of goods and ser-
vices, it is also true that the aims and ideals to
which this manner of economic life gives effect
act forcibly to offset all this incidental futUity.
These pecuniary aims and ideals have a very great
effect, for instance, in making men work hard and
unremittingly, so that on this ground alone the
business system probably compensates for any
wastes involved in its working. There seems,
therefore, to be no tenable ground for thinking
that the working of the modern business system
involves a curtailment of the commmiity's liveli-
hood. It makes up for its wastefulness by the
added strain which it throws upon those engaged
in the productive work.

CHAPTER IV

BUSINESS PRINCIPLES

The physical basis of modern busineaa traffic i
the machine procesa, as described in Cliapter II.
It ia essentially a modern fact, — late and yet in
its early stages of growth, especially as regards its
wider sweep in the organization of the industrial
system. The spiritual ground of business enter-
prise, on the other hand, is given by the institution
of ownership. "Business principles" are corolla-
ries under the main proposition of ownership ; tliey
are principles of property, — pecuniary principles.
These principles are of older date than the machine
industry, although their full development belongs
within the machine era. As the machine procesa
conditions the growth and scope of industry, and
as its discipline inculcates habits of thought suit-
able to the industrial technology, .so the exigencies
of ownership condition the growth and aims of
business, and the diacipUne of ownership and its
management inculcates views and principles (habits
of thought) suitable to the work of business traffic.

The discipline of the machine process enforces a
standardization of conduct and of knowledge in

it^niis of quantitative precision, and inculcates a
)iah'it of apprehending and explaining facts in
■Bprms of material cause and effect. It involves a
ffSaliiation of facts, things, relations, and even
personal capacity, in terms of force. Its meta-
physics is materialism and its point of view Ls that
of causal sequence.' Such a habit of mind con-
duces to industrial efficiency, and the wide preva-
lence of such a hahit is indispensable to a high
degree of industrial efficiency under modern con-
ditions. This habit of mind prevails most widely
and with least faltering in those communities that
have achieved great things in the machine industry,
being both a cause and an effect of the machine
process.

Other norms of standardization, more or less
alien to this one, and other grounds for the valua-
tion of facts, have prevailed elsewhere, as well as
in the earlier phases of the Western culture.
Much of this older standardization still stands
over, in varying degrees of vigor or decay, in that
ciuTent scheme of knowledge and conduct that
DOW characterizes the Western culture. Many of
these ancient norms of thought which have come
down fi-om the discipline of remote and relatively
primitive phases of the cultural past are still
strong in the affections of men, although most of
them have lost greatly in their power of constraint.

1 See ch. IX.

They no longer bind men's convictions as they
once did. They are losing their axiomatic
character. They are no longer self-evident or
self-legitimating to modem common sense, as they
once were to the common sense of an earlier time.

These ancient norms differ from the modem
norms given by the machine in that they rest on
conventional, ultimately sentimental gromids ; they
are of a putative natiu^. Such are, e.g., the
principles of (primitive) blood relationship, clan
solidarity, paternal descent, Levitical cleanness,
divine guidance, allegiance, nationality. In their
time and under the circumstances which favored
their growth these were, all and several, powerful
factors in controlling human conduct and shaping
the course of events. In their time each of theao
institutional norms served as a definitive ground
of authentication for such facts as fell under its
particular scope, and the scope of each was very
wide in the day of its best vigor. As time haa
brought change of circumstances, the facts of Ufa
have gradually escaped from the constraint of
these ancient principles; so that the dominion
which they now hold over the life of civilized men
is relatively slight and shifty.

It is among these transmitted institutional
habits of thought that the ownership of property
belongs. It rests on the like general basis of use
and wont. The binding relation of property to ibi

BUSINESS PEINCIPLES

owner is of a conventional, putative character.
But while these other conventional norms cited
above are in their decline, this younger one of the
inherited institutions stands forth without apology
and shows no apprehension of being crowded into
the background of sentimental reminiscence.

In absolute terms the institution of ownership
is ancient, no doubt ; but it is young compared with
blood-relationship, the state, or the immortal gods.
Especially is it true that its fuHer development is
relatively late. Not imtil a comparatively late date
in West European history has ownership come to be
emancipated from all restrictions of a non-pecun-
iary character and to stand in a wholly ijupersonal
position, without admixture of pcr.soual responsi-
bility or class prerogative.^ Freedom and inviola-
bility of contract has not until recently been the
unbroken rule. Indeed, it has not even yet been
accepted without qualification and extended to all
items owned. There still are impediments in the
way of certain transfers and certain contracts, and
there are exemptions in favor of property held by
certain privileged persons, and especially by certain
sacred corporations. This applies particularly to
the more backward peoples; but nowhere is the
"cash nexus" free from all admixture of ahen
elements. Ownership is not all-pervading and all-

' Cf., e.g., K. Jenka, Tjin nnd PnlUi'i in thf Middle Aga, ob. VI.

70 THE THEOlty OF BUSINESS

dominant, but it pervades and dominates the
affairs of civilized peoples more freely and widely
than any other single ground of action, and more
than it has ever done before. The range and
number of relations and duties that are habitually
disposed of on a pecuniary footing are greater
than in the past, and a pecuniary settlement is
final to a degree unknown in the past. The
pecimiary norm has invaded the domain of the
older institutions, such as blood-relationship,
citizenship, or the church, so that obhgationa be-
longing under the one or the other of these may
now be assessed and fulfilled in terms of a money
payment, although the notion of a pecuniary
liquidation seems to have been wholly remote from
the range of ideas — habits of thought — on which
these relations and duties were originally based.

This is not the place for research into the origin
and the primitive phases of ownership, nor even
for inquiry into the views of property current in
the early days of the Western culture. But the
views current on this head at present — the princi-
ples which guide men's thinking and roughly
define the right limits of discretion in pecuniary
matters — this common-sense apprehension of what
are the proper limits, rights, and responsibilities
of ownership, is an outgrowth of the traditions,
experiences, and .speculations of past generations.

^^■erefore some notice of the character of these
^^■adltional views and the circumstances out of
^n^ich they have arisen in the recent past is neces-
> iary to an underatanding of the part which they
ptay in modern life.' The theory of property pro-
fessed at a given time and in a given cultural region
shows what is the habitual attitude of men, for the
time being, on questions of ownership ; for any
theory that gains widespread and uncritical accept-
ance must carry a competent formulation of the
deliverances of common sense on the matter with
which it deals. Otherwise it will not be generally
accepted. And such a commonplace view is in its
turn an outcome of protracted experience on the
part of the community.

The modern theories of property run back to
Locke,* or to some source which for the present
purpose is equivalent to Locke ; who, on this as
on other institutional questions, has been proved
by the test of time to be a competent spokesman
for modem culture iu these premises. A detailed
examination of how the matter stood in the theo-
retical respect before Locke, and whence, and by
lat process uf selection and digestion, Locke de-
It has been said that the science of one tige is Lbe i.«ininoii sense
It might with ei|ual tralh be Hsid that the equity of one
tbo law of the next. If positive law 1b the basis of order,
■fc tlM »etive factor in progreM." — H. S. Foxwell, Intro-
er's Hight l-i thr Whale Prmliux of Labor, p. XI.

y, O/LWt ij-wi-'imrut, cli. V.

72 THE THEORY OF BUSINESS ENT

rived hia views, would lead too far afield. The
theory is sufficiently familiar, for in substance it
is, and for the better part o£ two centuries has
been, held as an article of common sense by nearly
all men who have spoken for the institution of
property, with the exception of some few and
late doubters.*

This modem European, common-sense theory
I says that ownership is a "Natural Right." What
a man has made, whatsoever " he hath mixed
his labor with," that he has thereby made hia
property. It is his to do with it as he will. He
has extended to the object of his labor that dis-
cretionary control which in the nature of things
he of right exercises over the motions of his own
person. It is his in the nature of things by virtue
of his having made it. " Thus labor, in the
beginning, gave a right of property." The per-

I Apart from the familiar blitorical matecials for the studjr of the
groiTth of national rights, including the right of property, there ue a
number oflatenrittngs that ma; be conaulted ; e.g. JeMluek, Declaration
0/ the RighU of Man and of the Citizen ; Rilohie, Natural RigJOs;
Bonar, chapters relating to this topic in Phllonnphy and Political
Eainomy ; Hbflding, History of Modern PkUoaophy, vol, 1.; Albee.
History of English UttUtnrianism ; and, lately come to hand, Scherger,
Evolution of Modern Liberty. Theae and other writers treat of natural
Tights aud the law of nature chiefly in other bearings than that of
ovmerahip ; while the legal writers treat tlie subject from the leg»l
rather than the de faeto standpoint. It is also not unusnnl to apeod
attention chieBy on the pedigree of the doctrines rather than on the
geaeiis and growth of the concepts. An endeavor at a genetic accoiut
of the modem concepta of ownership is found in Jenks, Law tnd
Ftilitiet In the Xidiilr. Agea, so also in Cunningham, Wafern Ctt/lliia-
tion in 111 Economic Aaperis.

force, the functional efficiency of the work-
' nan shaping material facts to human use, is in
this doctrine accepted as the definitive, axiomatic
ground of ownership; behind this the argument
does not penetrate, except it be to trace the work-
man's creative efficiency back to its ulterior source
in the creative efiBciency of the Deity, the " Great
Artificer." With the early spokesmen of natural
rights, whether they speak for ownership or for
' natural rights, it is customary to rest the
finally on the creator's discretionary disposi-
tions and workmanlike ellicieucy. But the refer-
ence of natural rights back to the choice ajid
creative work of the Deity has, even in Locke, an
air of being in some degree perfunctory ; and later
in the life-history of the natural-rights doctrine
it falls into abeyance; whereas the central tenet,
that ownership is a natural right resting on the
productive work and the diacretionary choice of
the owner, gradually rises superior to criticism
and gathers axiomatic certitude. The Creator
presently, in the course of the eighteenth century,
drops out of the theory of ownership.

It may be worth while to indicate how this
ultimate ground of ownership, as conceived by
modem common sense, differs from the ground
on which rights of the like class were habitually
fe lt to rest in mediaeval times. Customary au-
^Kority was the proximate ground to which rights,

THE THEOBY OF BUSINESS

powers, and privileges were then liabitually referred,
It was felt that if a clear case of devolution from
a superior could be made out, the right claimed
was thereby established; and any claim which
could not be brought to rest on such an act, or
constructive act, of devolution was felt to be in
a precarious case. The superior from whom
rights, whether of ownership or otherwise, de-
volved held his powers by a tenure of prowess
fortified by usage ; the inferior upon whom given
rights and powers devolveii held what fell to his
lot by a tenure of service and fealty sanctioned
by use and wont. The relation was essentially
a personal one, a relation of status, of authority
and subservience. Hereditary standing gave a
presumption of ownership, rather than conversely.
In the last resort the chain of devolution by virtue
of which all rights and powers of the common
man pertained to Iiiin was to be traced back
through a sequence of superiors to the highest,
sovereign secular authority, through whom in turn
it ran back to God. But neither in the case of
the temporal sovereign nor in that of the divine
sovereign was it felt that their competence to
delegate or devolve powers and rights rested on
a workmanlike or creative efficiency. It was not
so much by virtue of His office as creator as it
was by virtue of His office as suzerain that the
Deity was felt to be the source and arbiter of

BUSINESS PRINCIPLES

human rights and duties. In the course of cul-
tural change, as the mediseval range of ideas and
of circumstances begins to take on a more modem
complexion, God's creative relation to mundane

lairs is referred to with growing frequency and

Mstence in discussions of all questions of this
, but for the purpose in hand His creative

lation to human rights does not supersede His
tolation of sovereignty until the modern era is
lell begun. It may be said that God's tenure

[ office in the mediaeval conception of things was
a tenure by prowess, and men, of high and low
degree, held tlieir rights and powers of Him by
, a servile tenure. Ownership iji this scheme was
I etewardship. It was a stewardship proximately
inder the discretion of a secular lord, more re-
motely under the discretion of the divine Overlord.
And the question then pressing for an answer when
a point of competency or legitimacy was raised in
respect of any given human arrangement or in-
stitution was not, What hath God wrought? but,
What hath God ordained ?

This medisBval range of conceptions first began
to break down and give place to modem notions
in Italy, in the Renaissance. But it was in the
English-speaking communities that the range of
ideas upon which rests the modem concept of
natural rights first gathered form and reached
^K^ competent expression. This holds true with

76 THE THEORY OF BUSINESS ENTEEF

respect to the modern doctrines of natural rights
as contrasted with the corresponding ancient doc-
trines. The characteristically modem traits of
the doctrine of natiu-al rights are of English deri-
vation. This is peculiarly true as regards the
natural right of ownership. The material, histori-
cal basis of this English right of ownership, con-
sidered as a habit of thought, is given by the
modem economic factors of handicraft and trade,
in contrast with the mediaeval institutions of status
and prowess. England, as contrasted with the
Continent, during modem times rapidly substituted
the occupation of the merchant and the ubiqui-
tous free artisan as the tone-giving factors of her
everyday life, in place of the prince, the soldier,
and the priest. With this change in the dominant
interests of everyday life came a corresponding
change in the discipline given by the habits of
everyday life, which shows itself in the growth
of a new range of ideas as to the meaning of
human life and a new ground of finality for human
institutions. New axioms of right and truth
supplant the old as new habits of thought super-
sede the old.

This process of substitution, as a struggle be-
tween rival concepts of finality in political theory,
reached a dramatic climax in the revolution of
1688. As a battle of axioms the transition comes
to a head in the controversy between John Locke

Kh.

BUSINESS I'RLNCIPLES

id Sir Robert Pilmer. Filmer was tbe last effec-
tive spokesman of the mediiBval axium of devolu-
tion. Locke's tracing of natural rights, the riglit
of property among the rest, back to the work-
manlike performance of the Creator, marks tlie
form in which, at the point of transition, the
modern view pays its respects to the superseded
axiom of devolution and takes leave of it.

The scope given to the right of ownership in
later modern times is an outgrowth of the exigen-
cies of mercantile traffic, of the prevalence of
purchase and sale in a " money economy." The
habits of thought enforced by these exigencies
and by the ubiquitous and ever recurring resort
to purchase and sale decide that ownership must
naturally, normally, be absolute ownership, with
free and unquaHfied discretion in the use and
disposal of the things owned. Social expediency
may require particular limitations of this fnll dis-
cretion, but such limitations are felt to be excep-
i^oual derogations from the " natural " scope of

le owner's discretion.

On the other hand, the metaphysical ground
of this right of ownership, the ultimate fact by
virtue of which such a discretionary right vests
in the owner, is his assumed creative efficiency
as a workman ; he embodies the work of his
brain and hand in a useful object, — primarily,
it is held, for his own personal use, and, by further

78 THE THEOEY OF BUSINESS ENTEEPEISE

derivation, for the use of any other person to
whose use he sees fit to transfer it. The work-
man's force, ingenuity, and dexterity was the ulti-
mate economic factor, — ultimate in a manner
patent to the common sense of a generation habit-
uated to the system of handicraft, however doubt-
ful such a "view may appear in the eyes of a
generation in whose apprehension the workman
is no longer the prime mover nor the sole, or even
chief, efficient factor in the industrial proceas.
The free workman, master of his own motions
and with discretion as to what he would turn
his efforts to, if to anything, had by Locke's time
become an habitual fact in the life of the English
community to such a degree that free labor, of
the character of handicraft, was accepted uncriti-
cally as the fundamental factor in all human
economy, and as the presumptive original fact
in industry and in the struggle for wealth. So
settled did this habit of thought become that no
question was entertained as to the truth of the
assumption.

It became a principle of the natural order of
things that free labor is the original source of
wealth and the basis of ownership. In point
of historical fact, no doubt, such was not the
pedigree of modern industry or modem owner-
ship ; but the serene, undouhting assumption of
Locke and his generation only stands out the

UUSINESS PRINCIPLES 79

IjDore strougly aud uuequivocally for this its dis-
r crepancy with fact, ft is all the more evidently
a competent expression of the trend which Eng-
lish commou sense was following at this time,
I since this doctrine of a " natural " right of prop-
I erty based on productive labor carries all before
it, in the face of the facts. In this raatt«r Eng-
lish thought, or rather English common sense, has
led ; and the advanced Continental peoples have
r followed the English lead as the form of economic
porganization exemplified by the English -speaking
communities has come to prevail among these Con-
tinental peoples.

Such a concept belongs to the regime of handi-
craft and petty trade, and it is from, or through,
the era of handicraft that it has come down to
, the present.' It fits into the scheme of handi-
craft, and it is less fully in consonance with the
facts of life in any other situation than that of
handicraft. Associated with the system of handi-

< Wlutt appears xo be necessary lo the deTelopmont of such a. lenti-
aent it that neither gl&ver; nor the macbjne syaKm shall be pr»setiL
in MifElciem Eorce to give a prououiiced bias to the commumty'a habits
ot thought, at the same time thai each member of the coiunmnity, nr
«M!h miDor group of persuns, habituall^r carriex on it« owu work at lis
own disccBtioQ and fur ila uwn ends. Such a situatloo ma; or may
DM iDTolve handicraft as that term ia speclflcally understood. A pre-
aamption of similar import, but less pronounced and leas dedned,
Menu to prevail in on uncert^n degree among many peoples on a
low suge of culture. The tenet, accordingly, has some claim to stand
^ an expresiion of " natural " right, even when " natural " ii lakeu
tu an evolutionary sense.

80 THE THEOBiT OF BUSINESS ENTEBPEISE

craft, as its correlate, was the sjatem of petty
trade ; and as the differentiation of occupations
was carried to a high degree, purchase and sale
came to prevail very generally, and the commimity
acquired a commercial complexion and commercial
habits of thought. Under these circumstances
the natural right of ownership came to com-
prise an extreme freedom and facility in the
disposal of property. The wliole sequence of
growth of this natural right is, of course, to be
taken in connection with tlie general growth
of individual rights that culminated in the eigh-
teenth-centmy system of Natural Liberty. How
far the English economic development is to be
accounted the chief or fundamental factor in the
general growtli of natural rights is a question
that cannot be talten up here. The outcome, so
far as it immediately touches the present topic,
was that by the time of the industrial revolution
a fairly consistent standardization of ecdnomic
life had been reached in terms of workmanship
and price. The writings of Adam Smith and
his contemporaries bear witness to this. And
this eighteenth-century standardization stands over
as the dominant economic institution of later
times.' Such, in outline, seem to be the hiatori-

■ Taken by otid lai^, the standard I zation of condun, knunledge,
and idealii current in ilie elghteencli century, and consoiiant tilth tli«
elghteentli-century economic alttiatiiin, \s in the last analysis redncible
to terms ut norkuuiiiUke tfficitncy rntlier tlian terms of matcrliU

BUSINESS PRINCII'LES

cal antecedents and the spiritual basis of the
modem institution of property, and therefore of
lainess enterprise as it prevails in the present.'
This sketch of the genesis of the modern institu-
n of property and of modern business principles
ly seem dubious to those who are inclined to give
a more substantial character than that of a habit
thought, — that is to say, those who still adhere
the doctrine of natural rights with something
the eighteenth-century naivete. But whatever
ly be accepted as the ulterior grounds of that
'Cultm-al movement which culminated in the system
of Natural Liberty, it is plain that the industrial
;d commercial experience of western Europe,
primarily of England, from the fifteenth to
eighteenth century, had much to do with the
outcome of the movement in so far as natural
liberty touches economic matters. It is as an
outcome of thi,s recently past phase of economic
development that we have incorporated in the law,

uuue and effect. Tliis Icniiing to peraonal. ^rorkiiiaulikG efficleocy
ts an ultimate tena shows iUelE even in tbe ecience of that time, e.g.
In the qtiaal-perBonal character imputed to the so-called "natural
Uirn" which then largely oocupied soientiflc speculation j almilarlj lu
the RomaDlie Uteratare and political philosophy.

> As late as the clnae of tbe sixteeaUi century English law and
usage iu the matter of loans for interest and other contracts at a pecun-
iary charactfr were in a less advanced &tate, admitted a lexa [nil and
free discretion, than the corresponding development on the Conllaent ;
but from about that time the English rapidly gains ou the Continental
community in (he habitual acceptance and appticatlnn of these "busi-
piM priuciples," and it has since then held tbe lead in this respect. ^^^^M

82 THE THEORY OF BUSINESS ENTERPRISE

equity, and commou sense of tt^day, tLese peculiarly
free and final property rights and obligations, that
is to say, those peculiar principles that control cur-
rent business and industry. We owe to the eigh-
teenth century a very full discretion and free awing
in all pecuniary matters. It has given freedom of
contract, together with aeciu-ity and ease of credit
engagements, whereby the competitive order of
business has been definitively installed.'

The subject-matter about which this modem
pecimiary discretion turns, with all its freedom
and inviolabihty of contract, is money values.
Accordingly there underlies all pecuniary contracta
an assumption that the unit of money value does
not vary. Inviolability of contracta involves this
assumption. It is accepted uuquestioningly as a
point of departure in all business transactions.
In the making and enforcement of contracts it is
a fundamental point of law and usage that money
does not vary.' Capitalization as well as contracts
»re made in its terms, and the plans of the business
men who control industry look to tlie money unit
as the stable ground of all their transactions,
Notoriously, business men are jealous of any
attempt to change the value or lessen the stability

> Cf. SombftTl. Sapitalinmiu, vol. II. ch. II.

* On the putative atKbillty of the money uolt, cf. W. Vf. CftrUle,

The Svolvtion nf Modern Mvnty, pi. II, cb. IV.

BUSINESS FRINL'IPLES

^Ktual

m the money uuit, which gous to show how eseen-
lial a principle in business traffic is the putative
invariability of the inouej' unit.'

Usage fortified by law decides that when prices

,ry the variation ia held to occur in the value of

le vendible commodities, not in the value of the

money unit, since money is the standard of value.

There is, of course, no intention here to question

the position, familiar to all economists, that fluc-

,tiona in the course of prices may as well be due

■ Ecoaomiais are in the habJL of speaking of money as a medium
of exchange, a " greal wh<jel " for the cireulalion of goods. In the
Mme Gonnectloa business traffic is spoken of as a means of obtaining
goods eaitable for conaumpUon, the end of all purchase and aale
being consumable goods, not money values. It rosy be true in some
profooDd pbiloeophical sense that money values are not the definitive
lenn of business endeavor, and that the business man seeks through
ll>e mediation of money to satisfy bis craving for consumable goods.
Iiookltig at the process of economic life as a whole and taking it in its
ntionaltzed bearing as a collectivB endeavor to purvey goods and
aerrlCM for the needs of collective humanity, the office of the money
Quit — money transactions, exchange, credit, and all the rest that make
up the pbenomcna of business — is perhaps justly rated as something
■ub^dikry. serving to facilitate the distribution of consumable goods
to the consumers, the consumption of goods being the objective
point of all tills traffic. Flacb is tbe view of this matter given by Ibe
ntJonaliHiic, normalizing speculations of the eighteenth-century plii-
loaophetB ; and such is, in substance, the view spoken for by those
cwinomiets who still cnnsiBl«ntly remain at the standpoint of the
eighteenth century. The contention need neither be defended nor
refnted here, since It does not seriously touch the facts of modem
biuiness. Within tbe range of business transactions this ulterior end
doea not necessarily come into view, at least not as a motive that
guides the tranaactions from day lo day. The matter is not so con-
eeived in bumnsHs transactions, it does not so appear on the face of
the negotiable Instruments. It is not in this manner that the money
unit enteis into the ruling habits of thought of buaiue«s men.

84 THE THEORY OF BUSINESS ENTEBPKI8E

to variation on the part of the money metals as to
a variation on the part of the ax-ticles whose prices
fluctuate. In so far as the distinction so made
between variations in the one or the other member
of a value ratio lias a meaning — which it is not
always clear that it has — it does not touch the
argument. It is a matter of common notoriety,
which has also had the benefit of reiterated statis-
tical proof, that, as measured, for instance, in
terms of livelihood or of labor, the value of money
has varied incontinently throughout the course of
history.

But in the routine of business throughout the
nineteenth century the assumed stability of the
money unit has served as an axiomatic principle,
in spite of facta which have from time to time
shown the falsity of that assumption.'

The all-dominating issue in business is the ques-
tion of gain and loss. Gain and loss is a question

' still, Utterly, In the trafGc of some of the more wide-awake
bOHtiieBa men, account U pracUcally taken of tbe variations of the
UDit of value. What may be the future effects of habitual and incon-
tinent variations of the unit, aucb as prevail iu the present, is of courie
impOBBlble to foretell. These variations seem.due mainly to lUe exteii-
alve prevalence of credit relations ; and the full development of credit
relations in biiHiness is atiparently a matter of the future ralber tban
of tbe recent past, in spite of the great improvements that have been
made in the use of credit. Tbe modern conventional imputation of
Blabilily to the money unit dales book lo ihe regime of a "money
economy," sucb as prevailed under the circumstances of handicraft
and the earlier huckstering commerce, and it holds ita place in the
developed "credit economy" largely as a survival of this ra ore ele-
mentary past phase of ei

(BUSINESS PRINCIPLES
of accounting, and the accounts are kept in terras
of the money unit, not in terms of livelihood, nor
in terms of the serviceability of the goods, nor in
terms of the mechanical efficiency of the industrial
or commercial plant. For business purposes, and
so far as the business man habitually looks into
the matter, the last term of all transactions is their
oatcome in money values. The ba.se line of every
enterprise is a line of capitalization in money
values. In current business practice, variations
from this base line are necessarily rated as varia-
tions on the part of the other factors in the case,
not as variations of the base line. The business
man judges of events from the standpoint of
ownership, and ownership runs in terma of money .^

Investments are made for profit, and indus-
trial plants and processes are capitalized on the
basis of their profit-yielding capacity. In the ac-
cepted scheme of things among business men, profits
are included as intrinsic to the conduct of business.
So that, in place of the presumption in favor of a
simple pecuniary stability of wealth, such as pre-
vails in the rating of possessions outside of business
traffic, there prevails within the range of business

■ Tbe conveniional acceptADce of tbe money unit; ss an Invariable
nc^mre of vaJne luid standard of wealth U of very ancient deiivatioD.
(Cf. Csrlile. Kvol«tinn of MnAem Monfy, pt. II. oli. I; Bldgeway,
Oiigtn af UetaUie Currmq/ anil Weighl Standnrds. ch. I., II.) Its

BQnt-dfty cnnaeqiiencex nre also of first-rate importADCP, ju will be
)dfc3ted in a later il

86 THE THEORY OF BUSINESS ENTERPRISE

traffic the presumption that there must in the
natural course of things be a stable and orderly
increase of the property invested. Under no eco-
nomic system earlier than the advent of the machine
industry does profit on investment seem to have
been accounted a normal or unquestionably legiti-
mate source of gain. Under the agrarian-manorial
regime of the Middle Ages it was not felt that the
wealth of the large owners must, as a matter of
course, increase by virtue of the continued employ-
ment of what they already had in hand — what-
ever may be the historical fact as regards the
increase of wealth in their bands. Particularly,
it was not the sense of the men of that time that
wealth so employed must increase at any stated,
"ordinary" rate per time unit, Similarly as re-
gards other traffic in those days, even as regards
mercantile ventures. Gain from investment was
felt to be a fortuitous matter, not reducible to a
stated rate. This is reflected, e.g., in the tenacious
protests against the taking or paying of interest
and in the ingenious sophistries by which the
payment of interest was defended or explained
away. Only under more settled commercial rela^
tions during the era of handicraft did the pay-
ment of interest gradually come to be accepted
into full legitimacy. But even then gains from
other business employments than mercantile traffic
were apparently viewed as an increase due to

BUSINESS PRINCIPLES 87

uluctive labor rather than as a profit on invest-
ment.' In industrial pursuits, as distinct from mer-

ntile traffic proper, profits apparently come to
figure as a regular and ordinary incident only when
the industries come to be carried on on a mercantile
basis by relatively large employers working witbs7
hired labor.

This orderly increase is, of course, taken account
of in terms of the money unit. The "ordinary"
rate of profits in business is looked upon as a
matter of course by the body of business men. It
is part of their common-sense view of afiairs, and is
therefore a normal phenomenon.' Gain, they feel,
is normal, being the piu-pose of all their endeavors;
whereas a loss or a shrinkage in the values in-
Tested is felt to be an untoward accident which
does not belong in the normal course of business,
and which requires particular explanation. The
normality, or matter-of-course character, of profits
in the modern view is well shown by the position
of those classical economists who are inclined to

hCf,, t.g., Mon, England's Trea$ure, particularly cb. n. ; Ashlay,
aomfc BlMorg and Theory, bk. II. ch. VI. pp. 301-897. This,
ntially handicrsift, preiniinption is reflected even In tbe clasalcEl
lomlsU, who teel a moral neceaBlty of eiplainiag profitH on Bome
■ of prodactivity. or even of worbmaiiablp in some sophisticated
le. The whole dliioiiaaion of the doctrine of Wages of Superintend-
ence wOl serve to illuatrate the caaa ; the point is well shown in Mr.
Dftridson'a article on "Eaminga of Management" in Palgrave's
Diaionary of Folillrnl Eronnmy.
^^^ 'The '■ ordinary" rate, of cinirse, differs in detail from one line
^^^Bf borineaH to Another, as well m from place lo place.

88 TIIK THEORY OF BUSINESS ENTERPRISK

include "ordinary profits" in the cost of produc-
tion of goods.

The precise meaning of *' ordinary profits " need
not detain the argument. It may mean net
average profits, or it may mean something else.
The phrase is sufficiently intelligible to the busi-
ness community to permit the business men to use
it without definition and to rest their reasoning
about business affairs on it as a secure and stable
concept ; and it is this commonplace resort to the
term that is the point of interest here.

At any given time and place there is an accepted
ordinary rate of profits, more or less closely
defined, which, it is felt, should accrue to any
legitimate and ordinarily judicious business venture.
However shifty the definition of this rate of
profits may be, in concrete, objective terms, it is
felt by the men of affairs to be of so substantia]
and consistent a character that they habitually
capitalize the property engaged in any given busi-
ness venture on the basis of this ordinary rate of
profits. Due regard being had to any special
advantages and drawbacks of the individual case,
any given business venture or plant is capitalized
at such a multiple of its eaming-capacity as the
current ordinary rate of profits will warrant.'

' Tbla statement applies with greater Bptness to the basiness situa-
Udq of England during the e&rUer three-quartera of the nlneteentli

century, and to ihe American sHuatioti of the third quarter of tbe

BUSINESS PRINCIPLES

Proceeding on the common-senae view built up out
of this range of habits o£ thought with respect to
Qormal profits and price phenomena, the business
comuiunity holds that times are ordinary or normal
flo long as the accepted or reasonable rate of profits
accrues on the accustomed capitalization ; whereas
times are good or brisk if the rate of gain ia
accelerated, and hard or dull if profits decline.
This is the meaning of the phrases, "brisk times"
and *' dull times," as currently used in any business
community.

Under the exigencies of the quest of profits, as
conditioned by the larger industry and the more
sweeping business organization of the last few
decades, the question of capital in business has
increasingly become a question of capitalization on
the basis of eaming-capacity, rather than a question
of the magnitude of the industrial plant or the
cost of production of the appliances of industry.
From being a sporadic trait, of doubtful legitimacy,
in the old days of the " natural " and " money "
economy, the rate of profits or earnings on invest-
ment has in the nineteenth century come to take
^e central and dominant place in the economic
1, Capitalization, credit extensions, and
the productiveness and legitimacy of any

■ ^e c

fcy iile]

luu it doM to the sitiutlon of the tast decade. Qu&lifica-
1 reqoired by the later phases of basinew deTslopment will be
d piemntlf.

90 THE THEORY OF BUSIJ^ESS ENTERPRISE

given employment of labor, are referred to the
rate of earnings as their final test and substantial
ground. At the same time the " ordinary rat« of
profits " has become a more elusive idea. The
phenomenon of a uniform rate of profits deter-
mined by competition has fallen into the back-
ground and lost something of its matter-of-fact
character since competition in the large industry
has begun to shift from the position of a stable
and continuous equilibration to that of an inter-
mittent, convulsive strain in the service of the
lai^er business men's strategy. The interest of
the business community centres upon profits and
upon the shifting fortunes of the profit-maker,
rather than upon accumulated and capitalized
goods. Therefore the ultimate conditioning force
in the conduct and aims of business is coming to
be the prospective profit^yielding capacity of any
given business move, rather than the aggregate
holdings or the recorded output of product.

But this latest development in the field of
industrial business has not yet come to control the
field. It b rather an inchoate growth of the
immediate present than an accomplished fact even
of the recent past, and it can be understood only
by reference to those conditions of the recent past
out of which it comes. Therefore it is necessary
to turn back to a fiuiher consideration of the
old-fashioned business traffic as it used to go on

BUSINESS PRINCIPLES

rby the competitive method before the competitive
order began seriously to be dislocated and take on
an intermittent character, as well aa to a consid-
eration of that resort to credit which has, in large
part, changed the competitive system of business
from what it was at the beginning of the nine-
fteentb century to what it has become at its close.

CHAPTER V

THE USE OF LOAN CREDIT

Credit serves two main uses in the regular
course of auch business as is occupied with the con-
duct of industry : {a) that of deferred payments in
the purchase and sale of goods — book accounts,
bills, checks, and the like belong chiefly under
this head ; and (h) loans or debts — notes, stock
shares, interest-bearing securities, deposits, call
loans, etc., belong chiefly here. These two cate-
gories of credit extension are by no means clearly
distinct. Forms of credit which commonly serve
the one purpose may be turned to the other use;
but the two uses of credit are, after all, broadly
distinguishable. For many purposes of economic
theory such a distinction might not be serviceable,
or even practicable ; it is here made merely for pres-
ent use. It is chiefly with credit of the latter class,
or rather with credit in so far as it is turned to use
for the latter purpose, that this inquiry is concerned,

Sup(K)se due credit arrangements have already
been made — in the way of investments in stocks,
interestrbearing securities and the like — such as to
plaoe the management of the industrial equipment
in competent hand.s. This supposition is not a

THE USE OF LOAN CISEDIT

^ffjiolent one, eince a condition roughly approxiniat-
rng to this prevails in any quiescent period of
industry, when there is no appreciable depression.

fcUude^ these " normal " conditions, the capital in-
nested in any given industrial venture is turaed
ftVer within a certain, approximately definite, length
of time. The length of time occupied by the turn-
over may vary from one establishment to another,
but in any given case the length of the turnover is
one of the important factors that determine the
chances of gain for the basiness concern in ques-
Indeed, if the general conditions of the
ide and of the market are given, the two factors
which determine the status and value of a given
sound concern, as seen from the business man's
standpoint, are the magnitude of the turnover and
the length of time it occupies.

The business man's object is to get the largest
aggregate gain from his business. It is manifestly
for his interest, as far as may be, to shorten the
process out of which his earnings are drawn,' or,
in other words, to shorten the period in which he
^ ^iima over his capital. If the turnover consumes
^Hta than the time ordinarily allowed in the line of

^^P ■ Tliia, of course, bus nothing la say to BQbm-Bawerk'H theory of
the enh&D cement of prodnction ihraugh leugtheniug tlie proceues ot
liidnstry. tlia theury ol the "roundabout metliotl" applies to the
t«cbnical, luaterial efficiency of tlie mecli&nica! process ; whet«aa the
^ut in qneetloD here is the intervaJ occupied in the turning over of

^^Jk^ven baiiQees capital B6hin-Bawerk's puaition may be question-

^^nk, boWBTer, on oUier grounds.

94 THE THEORy OF BUSINESS ENTERPRISE

industry in which he is engaged, he gains more
than the current rate of profits in that hne of buai-
neas, other things equal; whereas he loses if the
turnover takes more than the normal time. This
fact is forcibly expressed ui the maxim, "Small
profits and quick returns." There are two chief
means of shortening the interval of the turnover,
currently resorted to in industrial business. The
first is the adoption of more efficient, time-saving
industrial processes. Improvements of industrial
plant and industrial processes having this in view
are gaining in importance in the later develop-
ments of business, since a closer attention ia now
given to the time element in investments, and
great advances have been made in this direction.'
A second expedient for accelerating the rate of
turnover is the competitive pushing of sales,
through larger and more lurgent advertising and
the like. It is needless to say that this means of
accelerating business also receives due attention at
the hands of modern business men.

But the magnitude of the turnover, " the vol-
ume of business," is of no less consequence than
its rapidity. It is, of course, a trite commonplace
that the earnings of any industrial business are
a joint function of the rate of turnover and the

' Ct., e. ^..Wenier Sombart, " Der Slil des modemeQ Wirthachafu-
lebetia," AreMv flir aot. GeteUg. «. SlaU$lik, vol. XVn. pp. 1-20,
especially pp. 4-16. KeprinCed M ch. IV. vol. II. o£ Der modem
KapitalUmtu (Leipzig, 1002),

THE USE OF LOAN CREDIT

Tolume of business.' The business man may reacb
hii end of increased earnings by either the one or
the other expedient, and he commonly has resource
to both if he can. His means of increasing tlie
magnitude of the turnover is a resort to credit and
a close husbanding of his assets. He is under a
constant incentive to increase his liabilities and to
discount his bills receivable. Indebtedness in this
way comes to serve much the same purpose, as
regards the rate of earnings, aa does a time-aavmg
improvement in the processes of industry.' The
effect of the use of credit on the part of a business
man so placed is much the same as if his capital
had been turned over a greater number of times
ia the year. It is accordingly to his interest to
extend his credit as far as his standing and the
state of the market will admit."

'C(., €.g., MKrahall, FrinripUs of Eeonomie* {3d ed.), bk. VL
ch. VIL «ec8. 3 and 1.

• Cf. Laughlin, Priixciple* nf Money, p. 88.

» The turnover will coant for more in rtom eamings tA current
nuei if iiuLead of bin own capiUl aloim the biuineBs man also eD-
gagfa whatever funds he can borrow by using his capital ui collateral.
Hie turnover coanled on capital (value of the induHtrial equipment)
piiu credit, at eorrent raus, will be greater than that counted on the
capital alone used withont credit eitenRion, The turnover inajr be
■xprvMod as the product of the mass of values employed mulUpUed
bjr the vtlocitj. Heooe, if credit bo taken aa an indetertnlnate tno-

a ( °^ I of the capital used as collateral, we may aaj that

Tnmover =

. I capital +

; I.e.

96 THE THEOKY OF BUS1NKB8 ENTERPRISE

But on funds obtained on credit the debtor has
to pay interest, which, being deducted from the
groas earnings of the business, leaves, as net gain
due to his use of credit, only the amount by which
the increment of gross earnings exceeds the in-
terest charge. This sets a somewhat elastic limit
to the advantageous use of loan credit in business.
In ordinary times, however, and under capable
management, the ciurent rate of business earnings
exceeds the rate of interest by an appreciable
amount; and in times of ordinary prosperity,
therefore, it ia commonly advantageous to employ
credit in the way indicated. Still more so in
brisk times, when opportunities for earnings are
many and promise to increase. To turn the propo-
sition about, so as to show the run of business
motives in the case: whenever the capable busi-
ness manager sees an appreciable difference be-
tween the cost of a given credit extension and the
gross increase of gains to be got by its use, he will
seek to extend his credit. But under the regime

The KlgshraJc Btatement serves to briog out the equlvaleoce between
&u acceleration of the rate ol turnover and an incresBe ol the volume
of hiuinesB caplIAl. C(. Jevona, Theory of Politiad Economy, pp.
240-268.

Sombut Is mistaken 1q saying l^KapiialUmus, vol. IL ch. TI. p. 74)
that the use of credit lengtheas the time of turnover of capUmL
Credit abortena the time relative!)' to the mitgnitude ot the
£«. ft given initUl capital by tbe help of credit turns ovei

pecuuikry tuagoitude In a given lime: ' ■>-.

THE USE OF LOAN CREDIT 97

lof competitive business whatever is generally ad-
geous becomes a necessity for all competitors.
I who take advantage of the opportunities
ed by credit are in a position to undersell
any others who are similarly placed in all but this
respect. Speaking broadly, recourse to credit be-

■ comes the general practice, the regular course of
competitive business management, and competition
goes on on the basis of such a use of credit as an
auxiliary to the capital in hand. So that the
competitive earning capacity of business enter-
^^prises comes currently to rest on the basis, not of
^Hthe initial capital alone, but of capital plus such
borrowed fimds as this capital will support.

The competitive rate of earnings is brought to
^^ correspond with this basis of operation; the con-
^^■•equence being that under such competitive em-
^^•ployment of credit the aggregate earnings of an
^■enterprise resting on a given initial capital will
^^KIk but slightly larger than it might have been if
^Biuch a general recourse to credit to swell the
^HTolume of business did not prevail. But since
^Hmich use of credit prevails generally, a further con-
^^Ksequence is that any concern involved in the open
^Hbosiness competition, which cannot or does not

take recourse to credit to swell its volume of busi- j

nesa, will be imable to earn a " reasonable " rate I

rs. So that the general practice drives I

)etitor8 to the use of the same expedient ; I

98 THE THEORY OP BUSINESS ENTERPRISE

but since the advantage to be derived from this
expedient is a competitive advantage only, the
universality of the practice results in but a slight,
if any, increase of the aggregate earnings of the
business community. Borrowed funds afford any
given business concern a differential advantage as
against other competitors ; but it is, in the main,
a differential advantage only. The competitive
use of such funds in extending business operations
may, incidentally, throw the management of some
portion of the industrial process into more com-
petent or less competent hands. So far as this
happens, the credit operations in question and the
use of the burrowed funds may increase or dimin-
ish the output of industry at large, and so may
affect the aggregate earnings of the business com-
munity. But, apart from such incidental shifting
of the management of industry to more competent
(or less competent) hands, this competitive use of
borrowed funds has no aggregate effect upon earn-
ings or upon the industrial output.

The current or reasonable rate of profits is,
roughly, the rate of profits at which business men
are content to employ the actual capital which
they have in hand.' A general resort to credit
extension as an auxiliary to the capital in hand
results, on the whole, in a competitive lowering
of the rate of profits, computed on capital plus
' See Manball, as above.

THE USE OF LOAN CREDIT

^Bedit, to such a point as would not be attractive
to a business man who must confine liimself to the
employment of capital without credit extension.
On an average, it may be said, the aggregate earn-
ings of the aggregate capital with credit extension
are but slightly greater than the aggregate earn-
ings of the same capital without credit extension
would be in the absence of a competitive use of
credit extension. But under modern conditions
business cannot profitably be done by any one of
the competitors without the customary resort to
credit. Without the customary resort to credit a
" reasonable " return could not be obtained on the
investment.

To the extent to which the competitive recourse
to credit is of the character here indicated — to
the extent to which it is a competitive bidding
for funds between competent managers — it may
be said that, taken in the aggregate, the funds so
added to business capital represent no material
capital or "production goods." They are business
capital only; they swell the volume of business,
as counted in temis of price, etc., but they do not
directly swell the volimae of industry, smce they
do not add to the aggregate material apparatus of
industry, or alter the character of the processes
employed, or enhance the degree of efficiency with
vhicb industry is managed.
I The " buoyancy " which a speculative inflation

Ul(J THE THEORY OF BUSINESS ENTERPRISE

uf values gives to industrial business may indi-
rectly increase the material output of industry by
enhancing the intensity with which the industrial
process is carried on under the added stimulus;
but apart from this psychological effect the expan-
sion of business capital through credit extension
has no aggregate industrial effect. This secondary
effect of credit inflation may be very considerable
and is always present in brisk times. It is com-
monly obvious enough to be accounted the chief
characteristic of a period of "prosperity." For
a theory of industry this indirect effect of credit
inflation would be its main characteristic, but for
a theory of business it occupies the place of a

K corollary only.
To the view set forth above, — that borrowed
funds do not increase the aggregate industrial
equipment, — the objection may present itself that
all funds borrowed represent property owned by
some one (the lender or his creditors), and trans-
ferred, in usufruct, by the loan transaction to the
borrower ; and that these funds can, therefore, be
converted to productive uses, like any other funds,
by drawing into the industrial process, directly or
indirectly, the material items of wealth whose
fluent form these funds are.' The objection fails
at two points : (o) while the loans may be covered
by property held by the lender, they are not fully

' C(. Langhliu, Princlpta of Mvney, ch. IV.

THE USE OF t'OAU .CKEDIT 101

■ered by property which is hot -aiready other-
engaged ; and even if such wfif'e'rth*' case, it
uld (&) not follow that the use of these blinds
luld increase the technical (materia!) oiftfit-'.^f
ustry. ■■■■:

As to the first point (a) : Loans made by the
lancial houses in the way of deposits or other
advances on collateral are only to a fractional
extent covered by liquid assets;' and anything but
[uid assets is evidently beside the point of the
int question. An inconsiderable fraction of
lese loans is represented by liquid assets. The
greater part of the advances made by banking
houses, for instance, rest on the lender's presump-
tive ability to pay eventually, on demand or at
matuiity, any, claims that may in the course of
business be presented against the lender on ac-
count of the advances made by him. It is a busi-
ness truism that no banking house could at a
moment meet all its outstanding obligations.- A
necessary source of banking profits, e.g., is a large
excess of the volume of business over reserves.
As to (&) : Another great part of the basis of
ih loans is made up of invested funds and col-
iral held by the lender. These at the same
are much of the basis on which rests the

' Property convertible into cash nt will.

* The legftlly oblignlory rrNervc for the J^ationiLl Banks, tor inatatice,
b 35 per cent, of cnniliineil nottt clrctil&iion and iI<!]>u9|ia in cenlml
rcaurro Uiiks, 1.", p^icti.t. in oi.ljora. — Jfcffurrf .Sfifw^M, SIOI.

102 THE THEORY. QP BUSINESS ENTERPRISE

lender's preeuriiptive ability to pay claims pre-
sented. ■, 'Sy t' these investments, in industry or
real'-.est&t'e, in interest-bearing aeemitiea and col-
Jajeral of whatever description, represent future
.;'^tome of the lender's debtors (as, e.g., government
■ and municipal securities), or property which is
already either engaged in the industrial process or
tied up in forms of wealtli (as, e.g., real estate)
which do uot lend themselves to industrial uses.
Loans obtained on property which has no prasent
industrial use, which cannot in its present form or
under existing circumstances be employed in the
processes of industry (as, e.fj., speculative real
estate), or loans on property which is already en-
gaged in the industrial process (as, e.g., stocks,
industrial plant, goods on hand, real estate in
use),' represent, for the purpose in hand, nothing
more substantial than a fictitious duplication of
material items that cannot be drawn into the in-
dustrial process. Therefore such loans cannot,
at least not directly, swell the aggregate industrial
equipment or enhance the aggregate productivity
of industry ; for the items which here serve as
collateral are already previously in use in industry
to the extent to which they can be used. Prop-

■ This tnkes account of advances made by other lenders than the
regular banbing boiuua who exclude mortgages on real estate from
their co11al«ra1 ; aiich, t.g.. an the long time advances (Investtnenla In
tecurilies) made by on viiie>i- banks, insurance companies, minor privalv

and nionuiige banks, iitivalf leiideis, etc.

THE USE OF LOAN CREDIT

103

^B*rty of these kinds — what is already in use in
^■industry and what is not of uae for industrial piu:-
^H poses — may be "coined into means of pajTnent,"
^Vand so may be made to serve as additional pecun'
iary (business) capital, but such property is me-
chanically incapable of serving as additional
material (industrial) capital. To a very consid-
erable extent the funds involved in these loans,

therefore, have only a pecuniary (business) exist-

^Lence, not a material (industrial) one ; and, so
^^nar as that is true, they represent, in the aggre-
gate, only fictitious industrial equipment. Even
such inconsiderable portion of them, however, as
represents metallic reserves also adds nothing to
the effective material apparatus of industry ; since
money as such, whether metallic or promissory, is

Bof no direct industrial effect ; as is evident from
&e well-known fact that the absolute quantity of
fee precious metals in use is a matter of no con-
sequence to the conduct of either business or in-
dustry, so long as the quantity neither increases
nor decreases by an appreciable amount. Nummus
wummum non pant.

So that all advances made by banking houses or

hy other creditors in a like case, — whether the

_fMlvancea are made on mortgage, collateral or

Kfaonal notes, in the form of deposits, note issues,

r what not ; whether they are taken to represent

Uie items of property covered by the collateral

104 THE THEORY OF BUSINESS ENTERPRISE

the cash reserves of the banks, or the genera!
solvency of the creditor or debtor, — all these
" advances " go to increase the •' capital " of which
business men have the disposal ; but for the mar
terial purposes of industry, taken in the aggregate,
they are purely fictitious items.' Cash loans (such
as savings-bank deposits* and the like) belong in
the same category. All these advances afford the
borrower a differential advantage in bidding against
other business men for the control and use of in-
dustrial proces.ses and materials, they afford him
a differential advantage in the distribution of the
material means of industry; but they constitute
no aggregate addition to the material means of
industry at large. Funds of whatever character
are a pecuniary fact, not an industrial one ; they
serve the distribution of the control of industry
only, not its materially productive work.

Loan credit in excess of what may serve to
transfer the management of industrial materials
from the owner to a more competent user — that
is to say, in so far as it is not, in effect, of the
nature of a lease of industrial plant — serves, on
the whole, not to increase the quantity of the

■Ttia tmUm is frequenlly overlooked in theoretioal dUcussions;
honce, as the present argument requires its recognition, It is here
Blftled in tills ejplicit way.

' Tiie cash loans made by depoaltore to snTings-bankB In the form
• it liepOBlU.

THE USE OF LOAJf CEEDIT

106

material means of industry nor, directly, to en-
liance the effectiveness of their use ; but, taken
in the aggregate, it serves only to widen the dis-
crepancy between business capital and industrial
equipment. So long as times are brisk this dis-
crepancy ordinarily goes on widening through a
progressive extension of credit. Funds obtained
on credit are applied to extend the business;
competing business men bid up the material items
of industrial equipment by the use of fimds bo
obtained; the value of the material items em-
^yed in industry advances ; the aggregate of
'Values employed in a given undertaking increases,
with or without a physical increase of the induft-
trial material engaged ; but since an advance of
credit rests on the collateral as expressed in terms
of value, an enhanced value of the property affords
a basis for a further extension of credit, and so

Now, the base line of business transactions is
the money value (market or exchange value, price)
of the items involved, not their material efficiency.
The value of the money unit is by conventional
usage held to be invariable, and the lenders per-
force proceed on this assumption, so long as they
proceed at all." Consequently, any increase of

1 Ct Tvxlffk CeMiu of the United States, vol VII. p. c.

* Few, perhaps, would \n eel tenne maintain an argument that the
valoe of money does not vary, but still fewer would, in a credit trans-
action, proceed on a suppoBition at variance with that position. As

106 THE THEOEY OF BUSINESS EJJTEKPIUSE

the aggregate money values involved in the
current induatrial business enterprises will afford
a basis for an extension of loans, indistinguishable
from any other block of capitalized values, even if
the increase of capitalized values is due to credit
advances previously made on the full cash value
of the property hypothecated. The extension of
loans on collateral, such as stock and similar values
involved in industrial business, has therefore in the
nature of things a cumulative character. This
cumulative extension of credit through the en-
hancement of prices goes on, if other^vise undis-
turbed, so long as no adverse price phenomenon
obtrudes itself with sufficient force to convict
this cumulative enhancement of capitalized values
of imbecility. The extension of credit proceeds on
the putative stability of the money value of the
capitalized industrial material, whose money value
is cumulatively augmented by this extension itself.
But the money value of the collateral is at the
same time the capitalized value of the property,
computed on the basis of its presumptive eaming-
capacity. These two methods of rating the value
of collateral must approximately coincide, if the

tbe economisbt are aecusMmed to say, money lb the atandSird of de-
terred pajmeote. It is also, in tbe unreflecting apprehension of those
nho have practically to deal with wealth pheiionieua, felt to be tbe
standard and Inflexible meamure of wealth. The fact that this conren-
tlonal oaoge is embodied in law acts greatly to fortify the naJve accepU
aoce of none; and price as the definitive terms of noaltb. Se«pp. I
86 above.

THE USE OF LOAN CBEDIT

107

^■npitalization is to afford a stable basis for credit;
and when an obvious discrepancy arises between
the outcome given by the two ratings, then a re-
rating will be had in which the rating on the basis
^bf earning-capacity must be accepted as definitive,
^Bince earnings are the ground fact about which
^BiU business transactions turn and to which all
^Bnisiness enterprise converges. A manifest dis-
"crepaney presently arises in this way between
the aggregate nominal capital {capital plus loans)
engaged in business, on the one hand, and the
^Eftctual rate of earning-capacity of this business
Hl^ital, on the other hand ; and when this dis-
crepancy has become patent a period of liquidation
begins.

»To ^ve a readier view of the part played by
in credit in this discrepancy between the busi-
98 capital and the earning-capacity of industrial
concerns, it will be in place to indicate more
summarily what are the factors at play.

The earnings of the business community, taken
as a whole, are derived from the marketable output
of goods and services turned out by the industrial
Bjd^cess — disregarding such earnings as accrue to
^Btoie concern merely at the cost of another. The
effective industrial capital, from the use of which
this output, and therefore these earnings, arise,

rjregate of capitalized material items
ngaged in industry. The business

108 THE THEORY OF BUSINESS ENTERPRISE

capital, on the other hand, is made up of thia
capitalized industrial material taken as a fund
of values, plus good-will, plus whatever funds are
obtained on credit by using this capitalized indus-
trial material as collateral, plus funds obtained on
other, non- industrial, property used as collateral.
Through- the competitive use of funds obtained on
credit, as spoken of abovQ, the nominal value of
the capitalized industrial material is cumulatively
augmented so as to make it approximately equal
to its original capitalization plus whatever funds
are obtained on credit of all kinds. On this basis
of an expanded collateral a further extension of
credit takes place, and the funds so obtained are
incorporated in the business capital and turned
to the like competitive use, and so on.^ Capital
and earnings are counted in terms of the money
unit. Counted in these terms, the earnings {in-
dustrial output) are also increased by the process
of inflation through credit, since the competitive
use of funds spoken of acts to bid up prices of
whatever products are used in industry, and of
whatever speculative property is presumed to have
some eventual industrial use. But the nominal
J^ magnitude (value) of the earnings is not increased
in as large a ratio as that of the business capital ;
since the demand whereby the values of the outr

> Cr, Kiiles. (Ma und Cndtt, vol. II. ch. VI. wc. G, MpedaUj

THE USE OF LO^\-N CREDIT

109

^Mput are regulated is not altogether a business de-
mand (for productive goods), but is in great part,
and indeed in the last resort mainly, reducible to

■a consumptive demand for finished goods.'
Looking at credit extension and its use for pur-
poses of capital as a whole, the outcome which pre-
sents itself most strikingly at a period of liquidation
kis the redistribution of the ownership of industrial
property incident to the liquidation. The funds
obtained on credit are in great measure invested
competitively in the same aggregate of material
items that is already employed in industry apart
from the use of loan credit, with the result that
the same range of items of wealth are rated at a
larger niunber of money units. In these items of
wealth — which, apart from the use of credit, are
owned by their nominal owners — the creditors,
by virtue of the credit extension, come to own an
andivided interest proportioned to the advances

' The enbanccmeDt of Uie market value of the output do«s nol, iu
het. keep pace with the inflation ot business capitAl liuriog a period
of specnlatlve advaDce. Ih order that it ebould do so, and afford
nominal earnings proportionate to the inflated capital, it would bo
neceaMiT tbftt iniiomes should increase proportionately to tbe inflation
of capiUil ; but, even it this happened, the expenses of production
would thereby be bo increased (through the advance of wages and the
like) U to offset the entire Inflation of values for all consumptive goods
and Icftve only tbe advance in the values of productive goods as a net
nuugiii from which to draw an iucrea«e of earnings. The discrepancy
under discussion, however, is not dueentlrely to tbe presence of credit,
ud » (ally detailed analysis of the causes out of which It arises can,
therefore, not properly be presented lu this place.

110 THE THEOKY Of BUSINESS ENTERPlilSE

which they have made. The aggregate of these
items of property cornea hereby to be potentially
owned by the creditors in approximately the pro-
portion which the loans bear to the collateral plus
the loans. The outcome of credit extension, in this
respect, is a situation in which the creditors have
become potential owners of such a fraction of the
industrial equipment as would be represented by the
formula:' ,^^__^

capitahzation ( ■= collateral + loans)

In a period of liquidation this potential owner-
ship on the part of the creditors takes effect to

' So long u the rating ol the capitalized property rem^uB uadie-
turbed, the formula which eipresaes the creditora' claim iniilntaius the
form given above. It then aignlfies nothing wore than that the cred-
itors bold a claim on sucb a proportion of the aggregate capitalized
property involved an tbelr advances bear to the aggregate capitallu-
tion. But BO BOOn as a reratlng of the capitalized property cuten Iha
problem tbe tormula becomes

capital izatJ on + A capitalization

capitalization — A capitalization
aooording as tbe rerating of capitalization is in the direction of

enhancement or depreciation : - — — or ■ Daring

cap + A cap cap — A cap
brink timet), when capltallieaiian advances, the claim represented b; a
given loan covers a decreasing proportion of the aggregate capiulized

property involved (

; the denominator Increases and t

\cap + A

quotient Consequently decreases. Whereas, in a period of liquidation
the ratio of the creditors' claim to tbe aggregate capitalization in-
oreaaes by Eorce of the lowered i»tiug of the capitalized property

( ! V

\cap — A cap/

Ill

I the extent to whicL the liquidatiou is carried
■through.'

The precise measure and proportion in which the
^industrial property of the business community
passes into the hands of the creditors in a period of
liquidation can,of course, not be specified ; it depends
on the degree of shrinkage in values, as well as on
the degree of thoroughness with which the Hqui-
datioQ is carried out, and perhaps on other still less
ascertainable causes, among which is the degree of
closeness of organization of the business community.
^kII is, however, through the shrinkage of market
^Kvalues of the output and the industrial plant that
^Hkhe transfer of ownership to the creditor class takes
^B^lace. In case no shrinkage of values took place,
^^Rko such general transfer of ownership to the cred-
itors as a class would become evident.

In point of fact, the shrinkage commonly super-
is, in the course of modern business, when a
neral liquidation comes ; although it is conceiv-
hle that the period of acute liquidation and its
ittendant shrinkage of values need not supervene.
iBnch would probably be the case in the absence of
' competitive investment in industrial material on a
large scale. Secondary effects, such as perturbations
of the rate of interest, insolvency, forced sales, and
the like, need scarcely be taken up here, although

■ AD tboM who, at a period of Uquid&tioD, are boldera ot flaent
b vr of cl&Inu to fixed sums of monej are, for the preseot purpose,
B the position ot creditors.

112 THE THEORY OF BUSINESS ENTEEPEISE

it may be well to keep in mind that these secondary
effects are commonly very considerable and fai^
reaching, and that they may in specific instances
very materially affect the outcome.

The theoretical result of this summary sketch of
loan credit so far seems to be : (a) an extension of
loan credit beyond that involved in the transference
of productive goods from their owners to more com-
petent users is unavoidable under the regime of
competitive business — credit expansion is nor-
mally in some degree " abnormal " or " excessive " ;
(6) such a use of credit does not add to the aggre-
gate of industrially productive equipment nor in-
crease its material output of product, and therefore it
does not add materially to the aggregate gross earn-
inga obtained by the body of business men engaged
in industry, as counted in material terms of wealth
or of permanent values ; ' (c) it diminishes the aggre-
gate net profits obtained by the business men en-
gaged in industry, as counted in such terms, in that
it requires them to pay interest, to creditors outside
the industrial process proper, on funds which, taken
as an aggregate, represent no productive goods and
have no aggregate productive effect ; (d) there re-
sults an overrating of the aggregate capital engaged
in industry, compared with the value of the indus-

' This disregards the Indirect effects of s speculatlre advuice in
(be way of heigbtened intenalty of applicaiiou and fuller emptorment
of Lbe Industrial plant

THE USE OF LOAX CKEDIT

mately the amount of the

» loans on collateral; (Xth
bosiness capital, thereby ]

trial equipment at the stai'ting-pohit, by approxi-
mately the amount of the aggregate deposits and
the overrating swells the
raises the valuation of
collateral, and gives rise to a further extension
of credit, with further results of a like nature ;
(/) commonly beginning at some point where the
extension of credit is exceptionally large in propor-
tion to the material substratum of productive goods,
where the discrepancy between nominal capital
land earning-capacity is exceptionally wide, the
overrating is presently recognized by the creditor
and a settlement ensues ; (g) on the consequent
withdrawal of credit a forced rerating of the ag-
gregate capital follows, bringing the nominal aggre-
gate into approximate accord with the facts of
eaming-capacity ; {k) the shrinkage which takes
place in reducing the aggregate rating of business
capital from the basis of capital goods plus loans to
the basis of capital goods alone, takes place at the
expense of debtors and nominal owners of industrial
;<qmpment, in so far as they are solvent ; {i) in the
'period of liquidation the gain represented by the
raredit inflation goes to the creditors and claimants
of funds outside the industrial process proper, ex-
cept that so much as is cancelled in bad debts is
;tten off ; (/} apart from secondary effects, such
heightened efBciency of industry due to inflated
lues, changes of the rate of interest, insolvency,

THKORY OF HUSINESS ENTERPHISK

etc., the niaiu final outcome is a redistribution of
the ownership of property whereby the creditor class,
including holders and claimants of funds, is bene-
fited.

Since the modern industrial situation began to
take form, there have been two principal forms of
credit transactions current in the usage of the
business community for the purpose of investment :
the old-fashioned loan, the usage of which has
come down from an earlier day; and the stoclt
share, whereby funds are invested in a joint stock
company or corporation. The latter is a credit
instrument, so far as touches the management of
the property represented, in that (in earlier usage
at least) it effects a transfer of a given body of
property from tlie hands of an owner who resigns
discretion in its control to a board of directors who
assume the management of it. In addition to !
these two methods of credit relation there has,
during the late-modem industrial period, come
into extensive use a third class of expedients, viz.
debentures of one form and another — bonds of |
various t«nor, preferred stock, preference shares,
etc., ranging, in point of technical character and i
degree of liability, from something approaching the !
nature of a bill of sale to something not readily ,
distinguishable in effect imm a personal note.
The typical (latest and most highly specialized)

THE USK OF LOAN CKKDIT

iustruraent of this class is the preferred stuck.
This is in form a deed of ownership and in
effect an evidence of debt. It is typical of a some-
what comprehensive class of securities in use in
business community, in the respect that it
3 aside the distinction between capita! and credit.
' In this respect, indeed, preferred stock, more
adequately perhaps than any other instrument,
reflects the nature of the " capital concept " cur-
lent among the up-to-date business men who are
ugaged in the larger industrial affairs.

The part which debenture ci'edit, nominal and
virtual, plays In the flnancing of modern industrial
orations is very considerable, and the propor-
ion which it bears in the capitalization of these
orations apparently grows larger as time passes
and shrewder methods of business gain ground. In
the field of the " indastrials " proper, debenture
dit has not until lately been employed with full
ffect. It seems to be from the corporation finance
' American railway companies that business men
ave learned the full use of an exhaustive deben-
j credit as an expedient for expanding business
i&pital. It is not an expedient newly discovered,
mt its free use, even in railway finance, is relatively
bite. Wherever it prevails in an unmitigated
form, as with some railway companies, and lat-
terly in many other industrial enterprises, it
^^Btirows the capitalization of the business ccmcenx

*the I
vetsa
In t
adei
reflt

virt
^^porpori
^^kon w
^Hpirpore

116 THE THEORY OF BUSINESS ENTERI*RISE

affected by it into a peculiar, characteristically
modern, position in relation to credit. When cai^
ried out thoroughly it places virtually the entire
capital, comprieing the whole of the material
equipment, on a credit basis. Stock being issued
by the use of such funds as will pay for printing
the instruments, a road will be built or an indus-
trial plant established by the use of funds drawn
from the sale of bonds ; preferred stock or similar
debentures will then be issued, commonly of
various denominations, to the full amount that the
property will bear, and not infrequently somewhat
in excess of what the property will bear. When
tlie latter case occui-s, the market quotations of the
securities will, of course, roughly adjust the current
effective capitalization to the run of the facts, what-
ever the nominal capitalization may be. The
common stock in such a case represents " good-
will," and in the later development it usually
represents nothing but "good-will."* The mate-
rial equipment is covered by credit instruments —
debentures. Not infrequently the debentures cover
appreciably more than the value of the material
equipment, together with such property as useful
patent rights or trade secrets ; in such a case the
good-will is also, to some extent, covered by de-
bentures, and so serves as virtual collateral for a
credit extension which is incorporated in the buu-

I See Chapter VI.

^31663 •

THE USE OF LOAN CREDIT

I capital of the company. In the ideal case,
where a corporation is financed with due perspi-
cacity, there wUI be but an inappreciable proportion
of the market value of the company's good-will
left imcovered by debentures. In the case of a
railway company, for instance, no more should be
left uncovered by debentures than the value of the
** franchise," and probably in most cases not that
much actually is uncovered.
^B Whether capitalized good-will (including " fran-
^Vlduse" if necessary) is to be rated as a credit
extension is a nice question that can apparently
be decided only on a legal technicality. In any
case so much seems clear — that good-will is the
nucleus of capitalization in modem corporation
finance. In a well financed, fiourishing corporar
tion, good-will, indeed, constitutes the total remain-
ing assets after liabilities have been met, but the
total remaining asseta may not nearly equal the
total market value of the company's good-will ;
that is to say, the material equipment (plant, etc.)
of a shrewdly managed concern is hypothecated at
least once, commonly more than once, and its im-
material properties (good-will), together with the
evidences of its indebtedness, may also to some
extent be drawn into the hypothecation.'

' Tbe queetioQ of "stock watering,'" "overcapitiliiation," and

the like is scarcely pertinent in the case o[ a large Induatrial corpont-

H tion financed as the modem silualinn dcmaiida. Undei modern cir.

^k ntDatancea tbe commou aiock can scarcelj fall to be all " water,"

118 THE THEORY OF ItUSINESS ENTERPRISE

What has juat been said of the part borne by
good-will and debentures in the capitalization of
corporations should be taken in connection with
what was said above (pp. 100-104) as to the nature
of the securities ofiEered as collateral in procuring a
credit exte;ision. The greater part of the securities
used as collateral, and so " coined into means of pay-
ment," are evidences of debt, at tlie first remove or
farther from their physical basis, instruments of
credit recording a previous credit extension.

In the earlier period of growth of this debenture

unless In s small concem or under incompeteiii nunagemenL Nothing
bat " whMr " — under Ibe name of good-will — belongs in the common
stock ; whereas the preferred stock, which represents material equlp-
l, ie a debenture. "Overcapitalization," ou the other hand, if il
means anything tmder modem business conditions, must mean over-
capitalization as compared with eamiitE-capacitj, for there is nothiDft
else pertinent to coinp&re it viilh ; and eaming-capacity fluctuates,
while the basis (interest rates) on which the earning-capaclt; is to be
capitalized also fluctuates independently.

In effect, the adjustment of capitalization to eara lug-capacity is
taken care of by tlie market quotations of stock and other securities ;
and no other method of adjuaiment la of any avail, because capitaliza-
tion is a question of value, and market quotations are the last resort
in questions of value. Tbe value of any stock listed on the exchange,
or otherwise subject to purchase and sale, fluctuates from time to time ;
which comes to tlie same thing as saying that the eCfectuat capitajiia-
lion of the concern, represented by the securities quoted, fluctuates
from time to time. It fluctuates more or less, sometiuies very slowly,
but always at least so much as to compensate the long-period fluctua-
tions of discoimt rates In the money market i which means that the
purcba«e price of a given fractional interest in tbe corporation as a
going concern fluctuates so as to equate It with the capitalized value
of its pnlaUve earning-capacity. computed at current rates of discount
and allowing tor risks. Cf. Bi-purt nf the Ittilimtrlnl Commi»*(oti,
vol. I. p. 687 (Ti'Sliinony of Hogers) ; vol, XIII. pp. inC-107 (Teeii-
mony ol E. B. Chaiimiiii). See also Chapter VI, below.

THE USE OF LOAN CREDIT

financiering in industry, a;*, e.g., in the railroad

• financiering of the third quarter of the nineteenth
century, the process of expansion by means of de-
benture credit, in any given caae, was worked out
gradually, over a more or less extended period of
time. But as the possibilities of this expedient
^B have grown familiar to the business commimity,
^H the time consumed in perfecting the structure of
^H debentures in each case has been reduced; until
^Hjt is now not unusual to perfect the whole organizar
^Vtion, with its load of debentures, at the inception
of a corporate enterprise. In such a case, when a
corporation starts with a fuUy organized capital

I and debt, the owners of the concern are also its
ei^itors ; they are, at the start, the holders of
both common and preferred stock, and probably
also of the bonds of the company — so adding
another increment of confusion to the relation
between modem capital and credit, as seen from
the old-fashioned position as to what capitalization
^^ a&d its basis should be.

r This syncopated process of expanding capital by
the help of credit financiering, however, is seen at
its best in the latter-day reorganizations and coali-
I tions of industrial corporations ; and as this class
■ of transactions also illustrate another interesting
Baud characteristically modern feature of ci-edit
jfinanciering, the whole matter may best be set out

120 THE THEORY OF BUSINESS ENTERPRISE

in the way of a sketch of what takes place in a
case of coalition of industrial corporations on a
large scale such as recent industrial history has
made familiar.

The avowed end of these latter-day business
coalitions is economy of production and sale and
an amicable regulation of intercorporate relations.
So far as bears on the functioning of credit in the
attendant business transactions, the presence or
absence of these purposes, of course, does not
aSect the course of events or the outcome. These
avowed incentives do not touch the credit operar
tions involved. On the other hand, the need of
large credit in consummating the deal, as well as
the presumptive gains to be drawn from the credit
relations involved, offer inducements of their own
to men who are in a position to effect such a coali-
tion. Inducements of this kind seem to have been
of notable effect in bringing on some of the recent
operations of this class.

Credit operations come into these transactions
mainly at two points: in the "financing" of the
deal, and in the augmentation of debentures ; and
at both of these points there is a chance of gain —
on the one hand to the promoter (organizer) and
the credit house which finances the operation, and
on the other hand to the stockholders. The gain
which accrues to the two former is the more un-
equivocal, and this seems in some cases to be the

THE USE OF LOAN CREDIT

dominant incentive to effect the reorganization.
The whole operation of reorganization may, there-
fore, best be taken up from the point of view of
the promoter, who is the prime mover in the
matter.

A reorganization of industnal concerns on a
large scale, such as are not uncommon at the
present time, involves a campaign of business
strategy, engaging, it is said, abilities and respon-
sibilities of a very high order. Such a campaign
of business strategy, as carried out by the modem
captains of industry, runs, in the main, on credit
relations, in the way of financial backing, optione,
purchases, leases, and the issuance and transfer of
stock and debentures. In order to carry through
these large " deals," in the first place, a very
substantial basis of credit is required, either in
the hands of the promoter (organizer) himself or in
the bands of a credit house which " finances " the
organization for him.

The strategic use of credit here involved is, in
effect, very different from the old-time use of loan
credit in investments. In transactions of this class
the time element, the credit period, is an incon-
spicuous factor at the most ; it plays a very subor-
dinate and uncertain part. The volume of credit
at the disposal of a given strategist is altogether
the decisive point, as contrasted with the lapse of
time over which the incident credit extension may

122 THE THEORY OF BUSINESS ENTERPRISE

run. The usefulness of the credit extension is not
measured in terms of time, nor are the gains which
accrue to the creditor in the case proportioned to
the length of time involved.

This follows from the peculiar nature of the
work which tliese gi-eat captains of industry have
in hand, and more remotely, therefore, from the
pecuhar character of the earnings which induce
them to undertake the work. Their work, though
it is of the gravest consequence to industry, is not
industrial business, in that it is not occupied with
anything like the conduct of a continuous indus-
trial process. Nur is it of the same class as com-
mercial business, or even banking business, in that
there is no investment in a continued sequence of
transactions. It differs also from stock and prod-
uce speculation, as that is currently conceived,' in
that it does not depend on the lapse of time to
bring a change of circumstances ; although it has
many poiuts of similarity with stock speculation.
In its details this work resembles commercial busi-
ness, in that it has to do with bargaining ; but so
does all business, and tliia peculiar work of the
trust promoter differs from mercantile business in
the absence of continuity. Perhaps its nearest
business analogue is the work of the real estate
agent.

< See, t.g.., Emery. Sitv.alntion on Ihf Sfwrit and Produce
of the United States, ob. IV ; Hadley, Bconomta, eh. TV.

THE USE OF LOAN CREDIT 123

H The volume of credit involved is commonly very
great ; whereas the credit period, the lapse of time,
is a negligible factor. Indeed, if an appreciable
credit peiiod interveneB, that is a fortuitous circum-
^rttance. The time element in these credit operations
Bw in abeyance, or at the beat, it is an indeterminate
magnitude. Hence the formula shown above (p. 95,
a. 3) is practically not applicable to business of
this class. So far as bears upon the credit opera-
tioDS involved in these transactions of the large
finance, the question about which interest turns is
almost exclusively the volume of the turnover ; its
Telocity is a negligible quantity.

Such strategic use of credit is not confined to
the business of making or marring industrial coali-
tions. It is habitually to be met with in connec-
tion with stock (and produce) speculation, and
ramifications of the like use of credit run through
the dealings of the business community at large in
many directions; but it rarely attains the magni-
tude in the ser\-ice of stock speculation which it
reaches in the campaign incident to a trust-making
deal. The form of credit extension employed in
^bhese transactions with indeterminate time also
^■ftries. The older and more familiar form ia that
tof the call loan, together with the stock exchange
transactions for which call loans are largely used.
Here the time element is present, especially in
Bfcrm ; but the credit period is somewhat indeter-

124 THE THEOKY OF BUSINESS ENTERPRISE

minate, as is also the gain that accrues to the
creditor from the transaction ; although the cred-
itor's gain here continues to be counted at a (vari-
able) rate per cent, per time-unit. The strategic
use of credit in the afiairs of the large business
finance has much in commou with the call loan.
Indeed, the call loan in set form is often resorted
to as a valuable auxiliary recourse, although the
larger arrangements for financing such a campaign
of business strategy are not usually put in the form
of a call loan. The arrangement between the pro-
moter and the financial agent is commonly based
on a less specific stipulation as to collateral, and
the payment for credit obtained takes even less, if
any, account of the length of the credit period.
In financing a campaign of coalition the credit
house that acts as financial agent assumes, in effect,
an even less determinate credit responsibility.
Here, too, the gains accruing to the creditor are
no longer, even nominally, counted per cent, per
time-unit, but rather in the form of a bonus based
mainly on the volume of the turnover, with some
variable degree of regard to other circmnstancea.
Answering to the essentially timeless character
of the gains accruing to the financial agent, the
earnings of the promoter engaged in transactiona
of this class are also not of the nature of profita
per cent, per time-unit, but rather a bonus which
commonly falls imniediately into the shape of a

share in the capitalization of the uewly organized
concern. Much of the increment of capital, or
capitalization, that goes to the promoter is scarcely
distinguishable from an increase of the liabilities of
the new corporation {e.g. preferred stock); and
the remainder (e.g. common stock) has alao some
of the characteristics of a credit instrument. It ia
worth noting that the cost of reorganization, includ-
ing the bonus of the promoter and the financial
agent, is, in the common run of cases, added to the
capitalization ; that is to say, as near as this class
of transactions may be spoken of in terms borrowed
from the old-fashioned business terminology, what
answers to the "interest" due the creditor on the
credit extension in^'olved ia incorporated in the
"capital" of the debtor, without circumlocution or
faltering.'

The line between credit and capital, or between
debt and property, in the values handled through-
ont these strategic operations of coalition, remains
somewliat uncertain. Indeed, the old-fashioned
concepts of "debt" and "property," or "liabili-
ties" and "assets," are not fairly applicable to the
facts of the case — except, of course, in tlie way of
a technical legal distinction. The old-fashioned law
and legal presumptions and the new-fashioned facts

' Seport of the Industrial Commission, vol. I, (Teatimony of W, H.
Moore) pp. 060-863, (W. E. Reia) p. 849. (Gawa) p. 1032 ; vqI. IX.
(T. L. GiwDe) p. 491 ; toI. XHI. p. vlii, wltb corresponding tuU-
fflonj. See tiao Cbapui VI. below.

126 THE THIiOKY OF HUSlNESS ENTEKl'ltlSE

and usages are parting company, at this point aa
well as at some others in the atfairs of modern

When such a large transaction in the reorganiza-
tion of industrial concerns has been completed, the
values left in the hands of the former owners of
the concerns merged in the new coalition are only
to a fractional and uncertain extent of the nature
of material goods. They are in large part deben-
tures, and much of the remainder is of a doubtful
character. A large proportion of the nominal
collective capital resulting in such cases is made
up of the capitalized good-will of the concerns
merged.' This good-will is chiefly a capitalization
of the differential advantages possessed by the
several concerns as competitors in husiness, and ia
for the most part of uo use for other than competi-
tive business ends. It has for the most part no
aggregate uidustrial effect. The differential advan-
tages posse-ssed by business concerns as conipetitora
disappear when the competitors are merged, in the
degree in which they cease to compete with rival
bidders for the same range of basiness. To this
aggregate defunct good-will of the consolidated
concerns (which in the nature of things can make
only an imaginary aggregate) is added something

^ Beport of the lTtdn$tnal Commiaion, vol. 1. (TestUnouy of Dodd}
pp. 10M-1I)66. lOST. 1068-1059, (GkMa) pp. 1031-1023 ; vol. Xllt
p. u, with teaUmonjr.

THE USE OF LOAN CltlOHIT

ill the way of an increment of good-will belonging
tu the new corporation as such ; ' and the whole
is then represented, approximately, by the coramou
stock issued. The nominal capital of the concerns
merged (in good part based on capitalized good-
will) is aggregated, after an appraisement which
commonly equalizes the proportion of each by
increasing the nominal shares of all. This aggre-
gate is covered with common and preferred stock,
chiefly preferred, which is a class of debentures -*
issued under the form of capital. The stock, com-
mon and preferred, goes to the owners of the con-
cerns merged, and to the promoter and tlie financial
agent, as indicated above. In case bonds are
issued, these likewise go to the former owners, in
so far as they do not replace outstanding liabilities
of the concerns merged.

"Capital" in the enlightened modern business
usage means " capitalized presumptive eaming-
capacity," and in this capitalization is comprised
^the usufruct of whatever credit extension the
^Hiyen business concern's industrial equipment and
^^Htod-will will support.' By consequence the ef*
fectual capitalization (shown by the market quota-
tions) as contrasted with the nominal capital
(shown by the par value of the stock of all de-

' Report of the Iniluttrial CofiimUiion, vol. I. (Testimony of Dos
PUBOe) p. IITD t vol. XUl. (C. R. Flint) p. 48. Testtmoay lo Ui
iune effect recara elsewhere io the SepurC. See p. 12li, □. 1 above.

) Sm ClwpiST VI. below.

128 THE THKOEY OF BUSINESS ENTESPEISE

scriptionB) fluctuates with the fluctuations of the
prevalent presumption as to the solvency and
eaming-capacity of the concern and the good faith
of its governing board.

When the modern captain of industry reorgan-
izes and consolidates a given range of industrial
business concemsj therefore, and gives them a
collective form and name as an up-to-date corpora-
tion, the completed operation presents, in synco-
pated form and within a negligible lapse of time,
all that intricate process of cumulative augmentar
tion of business capital through the use of credit
which otherwise may come gradually in the course
of business competition. At the same time it in-
volves a redistribution of the ownership of the
property engaged in industry, such as otherwise
occurs at a period of liquidation. The result is,
of course, not the same at all points, but the
equivalence between the two methods of expanding
business capital and distributing the gains is close
in some respects. The resemblances and the dif-
ferences between the two processes, so far as relates
to credit, are worth noticing. The trust-maker is
in some respects a surrogate for a commercial
crisis.

When credit extension is used competitively in
the old-fashioned way for increasing the business
of competing concerns, as spoken of above (pp. 94-
100, 109-114), the expansion of business capital

THE USE OF LOAN CREDIT

through credit operations occupies a period of some
duration, commonly running over an interval recog-
ni2ed as a period of speculative advance or "rising
prosperity." Tbe expansion of capitalized values
then takes place more or less gradually through a
competitive enhancement of the prices of industrial
equipment and the like. The creditors then com-
monly come in for their resulting share in the
industrial equipment only at the period of liquida-
tion, with its attendant shrinkage of values. In
the timeless credit transactions involved in the
modem reorganizations of industrial business, on
the other hand, the creditors' claim takes effect
without an appreciable lapse of time, a liquidation,
or a shrinkage of values.

The whole process of credit extension, augmen-
tation of business capital, and distribution of pro-
ceeds ia reduced to a very simple form. The credit
extension is effected in two main forms : (a) the
"financing" undertaken by the credit house in
conjunction with the promoter, and {&) the issu-
ance of debentm-es. The bonus of the financing
house and promoter, as well as the debentures,
are all included in the recapitalization, together
with an increment of good-will and any other
incidental items of expense or presumptive gain.
The resulting collective capitalization {assets and
liabilities) is then distributed to the several parties
ooncemed in the transaction. The outcome, so far

I
I

^^ ooncemc

l;;0 THE TUKORY OF BUSINESS ENTERPRISE

as touches the present argument, being that when
the operation is completed the o^vnership of the
recapitalized industrial equipment, with whatever
other property is involved, appears distributed
between the former owuei-s, the promoter, and the
credit house which financed the operation. But.
by virtue of the debentures distributed, the former
owners, together with tlie other parties named,
appear in the role of creditors of the new corpora-
tion as well as owners of it ; tliey commonly come
out of the transaction with large holdings of pre-
ferred stock or similar debentures at the same
time that they hold the common stock. The
preferred stock, of course, is presently disposed of
by the large holders to outside parties. The ma-
terial equipment ia then practically the same as
it was before; the bu.siness capital has been aug-
mented to comprise such proportion of tlie good-
will of the several concerns incorporated as had
not previously been capitalized and hypothecated,
together with the good-will imputed to the new
corporation and such debentures as these items of
wealth will float.

The effective capitalization resulting is, of course,
indicated by the market quotations of the secui'i-
ties issued rather than by their face value. The
value of the corporation's business capital so indi-
cated need suffer no permanent shrinkage ; it will
suffer none if the monopoly advantage (good-will)

THE USE OV Ln\S CREDIT

^Hpf the Dew corporation ia sufficient to keep its
^Heaniing-capacity up to the rate on wliich the
^Hcapitalization is based.

^H It appears, then, that in the affairs of latter-
day business, as shown by modem corporation
finance, capital and credit extension are not al-
ii ways distinguishable in fact, nor does there appear
^^uo be a decisive business reason why they should
^Hhk distinguished. ** Capital" means "capitalized
' putative eaming-capacity," expressed in terms of
value, and this capitalization comprises the use of
alt feasible ci'edit extension. The business capital
of a modem corporation is a magnitude that fluc-
tuates from day to day ; and in the quotations of
Lits debentures the magnitude of its credit extension
< fluctuates from day to day with the course of
the miLrket. The precise pecuniary magnitude of
tiie business community's invested wealth, as well
aa the aggregate amount of the commvinity's in-
debtedness, depends from hour to hour on the
quotations of the stock exchange ; and it rarely

■happens that it remains nearly the same id the
aggregate from one week's end to the nest. Both
capital and credit, therefore, vary from hour to
hour and, within narrow limits, from place to
jtlace. The magnitude and fluctuations of business
[, — " capital " in the sense in which that
I ia used in business affairs, — of course, stand
1 no hard and fast relation to the material magui-

132 THE THEORY OF BUSINESS ENTERPRISE

tude of the industrial equipment ; nor do variations
in the magnitude of the business capital reflect
variations in the magnitude or the eflficiency of
the industrial equipment in any but the loosest
and most indecisive manner. So also, and for the
same reason, the magnitude and the variations of
the aggregate credit afloat at a given time bear,
at the most, but a remote, indirect, and shifty
relation to the aggregate of material wealth and
the material changes to which this wealth is subject.
All this applies witli peculiar cogency wherever and
in so far as industry and business are carried on
by modem expedients and in due contact with
the market

CHAPTER VI

MODERN BUSINESS CAPITAL

I What has been said on the use of loan credit
'lias anticipated much of what is peculiar in modem
business capital. Such is necessarily the case,
since it is in the estensive use of credit that the
later phases of the management of capital contrast
most strikingly with the corresponding features of
earlier business traffic. To follow the terminologi-
cal precedents set by German writers,! the late-
_jQodem scheme of economic life is a " credit
inomy," as contrasted with the " money econ-
tay " that characterizes early-modem times) The
nature of business capital and its relations to the
industrial process under the later, more fully
developed, credit economy is in some degree
different from what it was before the full and free
use of credit came to occupy its present central
position in business traffic ; and more particularly
is it at variance with the theoretical expositions of
the economists of the past generation.
• It has been the habit of economists and others
^to speak of *' capital " as a stock of the material
^beaus by which industry is carried on, — industrial

model
^beonoi
^my"

134 THE THEORY OF BUSINESS ENTEKI'RISE

equipment, raw materials, and means of subsistencei
This view is carried over from the situation in
which business and industry stood at the time of
Adam Smitli and of the generation before Adam
Smith, from whose scheme of life and of thought
he drew the commonplace materials and concep-
tions with which his speculations were occupied.
It further carries over the point of view occupied
by Adam Smith and the generation to whom he
addressed his speculations. That is to say, the
received theoretical formulations regarding business
capital and its relations to industry proceed
on the circumstances that prevailed in the days
of the " money economy," before credit and the
modem corporation methods became of first-class
consequence in economic affairs. (.They canvass
these matters from the point of view of the
material welfare of the community at large, as
seen from the standpoint of the utilitarian philoso-
phy.) In this system of social philosophy the
welfare of the community at large is accepted as
the central and tone-giving interest, about which a
comprehensive, iiarraonious order of nature circles
and gravitates. The.se early sjieculations on busi-
ness traffic turn about the bearing of this traffic
upon the wealth of nations, particularly as the
wealth of nations would stand in a " natural "
scheme of things, in which all things should work
toj^ether for the welfare of mankind.

MODERN BUSINESS CAPITAL

135

I The theory, or what there is in the way of a
%eory, of business capital in the received body of
doctrines is worked out from the point of view and
for the theoretical purposes of the eighteenth-
century scheme of natural liberty, natural rights,
and natural law ; and the received theorems con-
cerning the part played by capital and by the
capitalist are substantially of tlie character of laws
of nature, as that term was understood during the
period to which these theorems owe their genesis.
What these received theorems declare concerning
the nature and normal function of capital and of
the capitahst need not be recited here; their
content is familiar enough to all readers, lay and
learned. Also the merits of such a point of view
for purposes of economic theory, and the adequacy
£ the received concept of capital for the purposes
) which it was originally applied, need not detain
^e inquiry. (^Modern business management does
rot take that point of view, nor does "capital"
? such a meaning to the modern business man ;
ause the guiding circumstances under which
tdem business i« carried on are not those sup-
1 to be given by a beneficent order of nature,
tor do the controlling purposes of business traffic
"include that general well-being which constituted
the final term of Adam Smith's social philosophy.
As a business proposition, "capital" means a
aid of money values; and since the credit econ-

■4

136 THE THEOKY OF BUSINESS ENTEEPEISK

omy and corporation finance have come to be the
ruling factors in industrial business, this fund of
money values (taken as an aggregate) bears but a
remote and fluctuating relation to the industrial
equipment and the other items which may (perhaps
properly) be included under the old-fashioned
concept of industrial capital.'

Capital has been spoken of as the capitalized
(aggregated) cost of industrial equipment, etc.,^ —
a view which had its significance for economic
theory a hundred years ago ; but since corporation
finance has come to pervade the management of

■ Tlie distinction between business capital and "industrial capi-
tal '' or " capilal goods " has been shown by Knies, Geld uitd Credit,
vol. I. ch. II. pp. 40410. DIslinetions having a very similar eBect in
some bearings are to b« found in Kodberiua ("private capital" and
"national capital"), in Biihm-Bawerk ("acquisitive capital" and
"productive capital,'' or "private capital" and "social capital"), in
Clark ("capital" and '-capital goods"). Similar distincUons are
made by various writers to help out the incompetency of the received
dellnition of the term. The merit of these dlstinctioosdoes not concern
the present inquiry, since they are made for other purposes tJian that here
aimed at. The distinction made above is not an attempt to recast the
terminology of economic theory, but is simply an expedient for present
Mae. It amounts to an unqualified acceptance of the concept (more or
,esB well defined) which business men habitually attach to the term
"capital." Mr. F. A. Fetter has latterly spoken for the restriction
of "capital," as a technical term, practically to what ia here called
" businesa capital." Mr, Fetter's " capital concept," however, should
probably not be taken to cover intangible assets. The practical dis-
tinction is visible in the testimony of various witnesses before the
Industrial Commission, as also in the special report on " Secorltles,"
Report, vol. XIII,

*Even so late and comi)e(ent a student of corporate capital aa
J. von EJ)rOs1 is bound by this antique preconception, and his work
lias suffered in conaeqnenca. See PtnamttlJe ErgtbniMt fer Aetltrt-
gesellarhaft'n, p. ^.

^^^^V MOTiEUX BUSINESS CAPITAL 137

^■iosiness this view is no longer of particular use for
^■» theoretical handling of the facta. To avoid the
tedium of argument it may be conceded that under
the old dispeosatioii, of partnerphips and individual
management in husiness, the basis of capitalization
was the cost of the material equipment owned by
any given concern ; and so far as the methods of
partnership and private firms still prevails such
may still be the ciurent method of capitalization,
especially dejure. But in so far as business pro-
cedure and business conceptions have been shaped
in the image of the modern corporation (or limited
liability compaDy),(the basis of capitalization haa |
gradually shifted, until the basis is now no longer I
given by the cost of material equipment owned,
but by the earning-eapacity of the corporation as a )
going concern.! \

A given corporation's capital is, of course, ~de
'. a magnitude fixed in the past by an act of
slature chartering the company, or by an issn-
3 of stock by the company under the terms of
I charter or of the acts which enable it. But
de jure capitalization is nominal only, and
there are tew, if any, cases in which the effective
capital of a company coincides with its de jurs

This atAW of Lbs case in brought out, In a veiled manner, by the

proposition, exptmiitled in varying (orm by vorloua

that Ihe cr-nt <tl e({iiipiiiei>t nn wbicb capital! saUon must, in

take piAcfi H the vuut (>f reproduction of all valuable Ucnid

burgibU itnd inlaiiyible.

138 THE THCOKY OF BUSINESS ENTERPRISE

capital. Such could be the case only so long as
all the securities which go to make up the com-
pany's capital were quoted at par on the market.
The effective capitalization of any modem com-
pany, that is to say, the capitalization which is
effective for current business purposes as distinct
from the formal requirements of the charter, is
given by the quotations of the company's securi-
ties, or by some similar but less overt market
valuation in case the company's capital is not
quotable on the market. The effective (business)
capitalization, as distinct from the dejure capitali-
zation, is not fixed permanently and inflexibly
by a past act of incorporation or stock issue. It
is fixed for the time being only, by an ever
recurring valuation of the company's properties,
tangible and intangible, on the basis of their
eaming-capacity .'

In thLs capitalization of eamingKiapacity the
'nucleus of the capitalization is not the cost of
the plant, but the concern's good-will, so called,
as has appeared in the last preceding chapter."

' ■' Nothing la more iUuHive aiid deluafve than Uie idea Ituit U a cor-
poration's Block be only paid in in money at tbs otitset it is therefora
better oB than one that has is«aed its avxk tor propeny that coold
not be converted for one cent on the dollar. The question la irhat
asneU the corporation has got at the time of the particular transaoUon,
and that can be ascertained onLy by proseut Inquiry."— Testimony
of F. L. Sl«Uion, B'port of the Indimtrial Cnmniusion, vol. I. p. 976.
Cf Meade. 7Vii-( Finnn«*. ch. XVI- and XVm.

' Ehirtiing-capacity la practically accepted as the effective baals of
capital itation for corporate bualness ciincernB, particularly (or thoM

MODERN BUSINESS CAPITAL

13D

^P'Good-will" is a somewhat extensible term, and
'■ latterly it has a more comprehensive meaning than
it once had. Its meaning has, in fact, been gradu-
ally extended to meet the requirements of modem
business methods. Various items, of very diverse
character, are to be included xmder the head of
" good-will " ; but the items included have this
much in common that they are "immaterial
wealth," " intangilile assets " ; which, it may paren-
thetically be remarked, signifies among other
things that these assets are not serviceable to the
community, but only to their owners. Good-will
taken in its wider meaning comprises such things
as established customary business relations, repu-
tation for upright dealing, franchises and privi-
leges, trade-marks, brands, patent rights, copyrights,
exclusive use of special processes guarded by
law or by secrecy, exclusive control of particu-
lar sources of materials. All these items give a
differential advantage to their owners, but they

i>li(Me EeiMirities are quoted on Ihe market. It is iu tbc slock market
Ihat IhlE i^fTective capitalization takes place. But the law does not
recognize such a basis of capitalization ; nor are buHinesa men generally
nodj to adopt it in set form, although they constantly have recourse
lo it. in effect, in operations of investment and of credit axteosion.
CJ. BepoTt of the Industrinl Commisfion, vol. I. pp. 6, 17, 21
(Ten, F. B. Tburber) ; p. 007 (Test. V. L. Stetaon) ; pp. 5B6-68T
(TeBt. H. IL Rogers) ; pp. IIO-lll, 124 (Test. H. O, Havemeyer) ;
pp. 1021. 1032 (Teat. J. W. Gales) ; pp. 1064-1066 (Test. S. Dodd) ;
rol. Xin. pp. 287-288 (Teat. U. Bum) ; p. S88 (Teat. J. Honis) j
pp. 107-109 (Test.. E, R. Tbaproan). See Qunrtfrlg Joumal of
February I90a, pp. 3W-346, -The Holyoke Water
' for ail illustrative decision.

■•.J^ onontia, Pe
^^bn," for ail i

140 THE THEORY OF BUSINESS ENTERPRISE

are of no aggregate advantage to the community.'
They are wealth to the individuals concerned —
differential wealth ; but they make no part of the
wealth of nations.^

It is in the industrial corporations that this
capitalization of good-will is seen to the best ad-
vantage — iuclnding, under the term "industrial
corporations," railway companies, iron and steel
concerns, mines, etc., as well as what are known
in the stock market specifically as "industrials."
The corporation is, of course, not the only form of
business concern in the iodustrial field, but it b the
typical, characteristic form of business organization
for the management of industry iu modern times,
and the peculiarities of modem capital are there-
fore best seen in these modern corporations.
Many of these corporations have grown out of
partnerships and firms previously existing, and
such is still the genesis of many of the corpora-
tions that come forward from time to time. In
such a case of conversion from partnership or
firm to corporation the rule is that the new coi^

' The advantages afforded their owneni hy these Intangible asseis
have latterly been diaciissed by economiets under such headinge aa
"Kent" or "Qunsi-Itent." These ducuBsioiM. It is believud. are of
great theoretical weight. In busiiieas praclice, however, the items In
qneetion are treated as capital, which must avail ns an excuse (or
Including them here in bueinesa capital.

'Compare Brjliui-IJawi-rk's and Clark's dislinctionn belween "pri-
vate" and "social" capital, and between "capiial" and "capital

MODEKN BUSI^■ES8 CjU'ITAL

141

^^poration takes over a body of good-will, under one

'form and name or another, previously pertaining

to the pai-tiierahip which it displaces. Conversely,

_ wheu a flourishing peirtuership or similar private

irm has gained an assured footing of good-will,

. the way of any or all of the items enumerated

mder that term above, its lot, as prescribed by

Jsiodem business exigencies, is to go up into a cor-

wratiou, either by simple conversion into the cor-

)Otate form or through coalition with other firms

bto a larger corporate whole. There is in thia

latter uo hard and fast rule, of course. On the

hand, the approved methods of corporation

■finance may in some measure be resorted to by a

private firm, without formal conversion of the con-

c em into the corporate form ; and on the other

^^H^nd, an incorporated company may continue to

^^Bairy on its business after the manner usual witli

privately owned concerns. But taken by and

large, it will be found that with the assumption

^^pOf the corporate form is associated a more modem

^^miethod of capitalization and a freer use of credit.

^^KThe advantages which the corporate form offers in

^^nhese respects are commonly not neglected. The

^^Bnore archaic forms of organization and business

management, in which recourse is commonly not

had to tlie characteristic methods of coriwration

finance, prevail chiefly in those " backward " lines

I industry in whicli monopoly or other differential

142 THJi THEOliY OF BUSIMESS ENTEBPRISE

advantages of an intangible nature are not readily
attainable; sucb, e.g.f as farming, fishing, local
merchandisiug, and the minor mechanical trades
and occupations. In this range of industries
large (corporate) organization has hitherto been
virtually impracticable, and here at the same time
differential advantages, of the nature of good-will
(as indicated above), are relatively scant and pre-
carious. Where extensive differential advantages
of this kind come in, the corporate form of oi^ani-
zation is also likely to come in.

The cases are also fi-equent where a corporation
starts out full-fledged from the beginning, without
derivation from a previously existing private firm.
Where this happens, the start is commonly made
with some substantial body of immaterial goods on
which to build up the capitalization ; it may be
a francliise, as in the case of a railway, telegraph,
telephone, street-car, gas, or water company; or it
may be the control of peculiar sources of material,
as in the case of an oil or natural gas company, or
a salt, coal, iron, or lumber company ; or it may be
a special industrial process, patented or secret ; or
it may be several of these. When a corporation
begins its life history without such a body of im-
material differential advantages, the endeavors of
its management are early directed to working up a
basis of good-will in the way of trade-marks, clien-
tele, and trade connections which will place it in

MODEEX BUSINESS CAPITAL

ftuaething of a moDopoly position, locally or geuer-
illy.' Sliould the management not succeed in
these endeavore to gain an assured footing on some
inch " immaterial '" ground, its chances of success
among rival corporations are precarious, its stand*
ing is insecure, and its managers have not accom-
plished what is looked for at their hands. The
substantial foundation of the industrial corporation
is its immaterial assets.

The typical modem industrial corporation is a
fftincem of sufficient magnitude to be of something
more than barely local consequence, and extends its
trade relations beyond the range of the personal
contact of its directive officials. Its properties

id its debts are also commonly owned, in part at
it, by persons who stand in no direct personal
relation to the board of managers. In an up-to-
date corporation of this character the typical make-
up of the corporate capital, or capitalization, is
somewhat as follows : The common stock approx-
imately covers the immaterial properties o£ the
concern, unless these immaterial properties are dis-
proportionately large and valuable ; in case of a
relatively small and local corporation the common
stock will ordinarily somewhat more than cover the
value of the immaterial property and comprise
something of the plant ; in case of the larger con-
cems the converse is likely to be true, so that here

> See Cb&pter III. above.

cont

TUK TUEOKV OF BUSmESS ENTERPRISE

the immaterial property, intangible assets, ia made
to serve in some measure as a basis for other secur-
ities as well as for the common stock. The com-
mon stock, typically, represents intangible assets
and is accounted for by valuable trade-marks,
patents, processes, franchises, etc. Whatever
material properties, tangible assets, are in hand or
to be acquired are covered by preferred stock or
other debeutures. The various forms of deben-
tures account for the material equipment and the
working capital (the latter item corres]X)nding
roughly to the economists' categories of raw mate-
rials, wages fuud, and the like). Of these deben-
tures the preferred stock is the most characteristic
modern development. It is, de jure, counted aa a
constituent of the concern's capital and the prin-
cipal is not repayable ; in this (legal) respect it is
not an evidence of debt or a ci'edit instrument.'
But it has little voice in the dh^ction of the con-
cern's business policy.' In practice the manage-
ment rests chiefly on the holdings of common stock.
This is due in part to the fact that the preferred
bears a stated rate of dividends and is therefore
taken up by scattered purchasers as an investment
security to a greater extent than the common. In

' On the books of llie corpoiation it is, of i^ourae. carried as an item
of liability; as ie the i^uinmon Htock ; but tliat ia a twhnical expedient
of accountancy, anil does not touch tli« BubsUtntlrtl question.

'See tuatimony of varioiiB witneJweB on "CltpitaJlzatlDn'' befon
Uk Industrial Commiaaion, vols. L, IX., XIU,

this Cpractical) respect it aiiioitnts to a debenture.
Its practical character as a debenture is shown by
the stated rate of dividends, and where it is
" cumulative " that feature adds a further step of
assiiuilatioii to the ordinary class of debentures.
Indeed, in point of practical effect preferred stock
is in some respects commonly a more pronounced
credit instrument than the ordinary mortgage ; it
aUenatea the control of the property which it rep-
resents more effectually than the ordinary bond or
mortgage loan, in that it may pi'actically be a debt
hich, by ita own terms, cannot be collected, so
»i by its own terms it may convey a credit exten-
1 from the holder to the issuing corporation in
letuity. Its effect is to convey the dlscretion-
' control of the material properties which it is
beld to represent into the hands of the holders of
the common stock of the concern. The discretion-
ary management of the corporate capital is, by this
device, quite as effectually as by the use of ordinary
credit instruments, vested in the common stock,
which is held to represent the corporation's good-
will. The di.scretionary disposal of the entire!
vests in securities representing the intaii- |
In this sense, then, the nucleus of the j
corporate capitalization is the immaterial I
B covered by the common stock.^

caaea, the Robber Goods Mannfwlur-
A ty^jlcal iusUnce of a, corporatior

1* one of many lllustntlvE
I Oompaoj' may be taken a

140 tul: thkurv of business enterprise

This method of capitalization, therefore, effects a
somewhat thoroughgoing separation between the
management and the ownership of the industrial
equipment. Roughly speaking, under corporate
organization the owners of the industrial material
have no voice in its management, and where pre-
ferred stock is a large constituent of the capital
this alienation of control on the parts of the owners
may be, by so much, irrevocable. Preferred stock
is, practically, a device for placing the property it
represents in perpetual trust with the holders of
the common stock, and, with certain qualifications,
these tmstees are not answerable for the adminis-
tration of the property to their trustors. The
property relation of the owners to their property is
at this point attenuated to an extreme degree.
For most business purposes, it should be added, the
capital covered by other forms of debentures is in.

org&niud id a conserTBliive but up.to-datfi maoner for permanent sue-
oen and aUble value. Its Authorized issue nf stock is 925,000,000
7 per cent, cumulative preferred, and »2G,000,(KIO oommou. The aotual
isHUe in 1001 waa about $8,000,000 preferred and 917,000,000 common,
of wbich the preferred was presumed to cover the value of the tangible
aaset£. Another coalition organized by the same promoter (,Mr, C. R.
Flint). Uie Aiiiericaji Cbicle Company, iUnatrateB the same general
feature. The preferred stock of this company ($3,000,000) " in round
numbers was tkree limes the amount of tangible assets," while tha
common stock ($6,000,000} represents no tangible assete. The aggre-
gate capitalization is about nine times the tangible assets. The wit-
ness says that this corporation has been proved by evenia b> be "on
a conservative basis from the fact tliat the company has paid 8 per cent.
on its common stock," which has been selling at 80. — Eeport oflh»
Inituitrlal Commiuion. vol. XIII. pp. 47, 50.

MODERN BUSINESS CAPITAL

much the same position as that covered by the
preferred stock.'

> It may be argued that this identiflcation of the oommon stock
with the iniangiljle asaeta holds true in theory oal;, in the senae that
this i« the view beld by tbe buslnegs men •who occupy themselvea witti
such mauera ; while in point of (act no distinction of this nature be-
tween common and preferred stock ia or can practically be maintained
after the atock has once found Ita way Into the market. It might
seem, in other worda, that when the stock baa once paased the atage
of otfanhution and gone into the hands of the purchasers, each share
represents nothing but an undivided interest in the aggregate capital*
liation of the concern, ao that the particular item of wealth repre-
sented by a givpn share or given form of aecurity can no longer he
MeDtiSed.

On the face of the situation auch appears to be the cade, but there
are facts which argue for the view aet out above. It is, e.g., well
known tliat whenever circumstances arise which immediately aSect
the value of the good-will of a corporation, it is the quotations of the
common atock that first and moat decidedly are affected. If the good-
Dill of the concern makes a great and rapid gain, e.g. through mancBU-
vna which put it in a position of monopoly or through changes in the
goods market which greatly increase the demand for the concem'a
product, and the like, it is the quotation of tbe common stock that
measutes and registera the advantage which thereby accrues to the
eonceni, and tlie market fluctuation of the common stock ia llkewlae
the inatniment by means of which manipulations are carried through
tliat affect these intangible assets. At the sauie time thia rule does
not hold hard and fiut, as Is seen in case of a liquidation when the
capital of the concern may have shrunk to such dimensions that the
entire capital. Including the intangible assets, will no more than satisfy
the claims represented by the debentures. Still, in point of practical
tact, the (theoretical) preconception of hualneaa man that llie coni'
moD stock in some intelligible sense covets tbe intangible assets is
furij borne ont by everyday experience, taken by and large.

A curiona parallel might be traced between the current endeavors
of the bosinem community 1o organize and manage the industrial
equipment on the basis of Immaterial assets and the mediseval business
perplexities and fictions relative to loans on interest. In both cases
the buaineea community has bad to face untried exigencies together
with a popular, traditional prejudice that discountenances the exi>e-
dieuls by which these exigencies are to be meL The mediieval pre-
Kunption was that tbe management of productive goods and the

1-48 THE THEORY OF BUSINESS ENTERPRISE

The various descriptions of securities which in
this way repreaent corporate capital ai-e quotable
on the market and are subject to market fluctua-
tions; whereby it comes about that the aggregate
effective magnitude of the corporate capital varies
with the tone of the market, with the manoeuvres
of the business men to whom is delegated the
management of the companies, and with the acci-
dents of the seasons and the chances of peace and
war. Accordingly, the amount of the business
capital of a given concern, or of the business com-
munity as a whole, varies in magnitude in great
measure independently of the mechanical facts of
industry, as was noted above in si>eaking of loan
credit.' The market fluctuations in the amount

profiu accruing from their use must go to their users. (Cf. Ashley,
Eronomic Hfntonj, vol L cli. III., vol. II. ch. VI.; Endemann, We
nationaWkonomiifhe GrnndiiBUe dff knnonttfUtrhen Lehre.) The
modem presumptlou ia that the nianagemeut of the eiiuipment and
the gains from such manngement mnBt vest in the omien. The
modem exigencies decide tlia,t the equipment must be mutuged by
oihere than the oivneiu and that proflia luiul largely accrue to those
who flnancially manage the coiicem. The expedient by which Lhia
result is sought to be reached is the QcUon of iutangihle assets and the
impersonal, irrevocable credit exwneion covered by the preferred
slock. The effect is U> dissociate ownership from management. Thit
is the neceosary outcome of it "credit economy " consistently and
fully carried through. The management of ilie material equipment of
industry is thrown into the hands of those who own the immaterial
wealth ; that m to say, those who own the claim to manage the equip-
roent. The current prejudice which insists on management by Uie
owners is set aside by feigning that this claim has an industrial valoe,
and so capitalizing it on the basis of the differential advantage which
accmea to Its holders.

' See also a discussion by E. S. Meade, Quarterly Javmal qf
Sconomia, February 1802, pp. 317 el ««;., o( how •■ giwd-will '" may

MODERN BUSINESS CAPITAL

119

^■•of capital proceed on variations of confidence on
the part of the Investors, on current belief as
to the probable policy or tactics of the liuainess
_ men in control, on forecaats as to the seasons and
fthe tactics of the guild of politicians, and on the
indetenninable, largely instinctive, shifting move-
ments of public sentiment and apprehension. So
at under modem conditions the magnitude of
' the business capital and its mutations from day
to day are in great measure a question of folk
psychology rather than of material fact.

But in this uncertain and shifting relation of

the business capital to the material equipment

iiere are one or two points which may be set

[flown as fairly secure. Since the credit instru-

Inents involved in modem capitalization may be

Ibsed as collateral for a further credit extension,

s noted in the chapter on loan credit,' the aggre-

jate nomiual capital in hand at a given time

normally, larger by an appreciable amount

an the aggregate value of the material proper-

; involved ;^ and at the same time the current

valae of these material properties is also greater

than it would be in the absence of that credit

wry in mftgnltiiile, or even disappear, wliBn a concern pntora a larger
: also, on iheaaine general hea^, W. F, Willotighby, "Inte-
n ot Indufllry ia Ihe UniLed States," ibid., NoTciuber 1002,
L. lis above.

ap" = cap + -— >cap. In whicli cap' ia the nomloal capital, ns
M>ed by ilie crcilii eleiiieoL — ^

160 THE THEORY 01' BUSINESS ENTBKI'KI.SE

financiering for which corporate capitalization
affords a basis.'

German writers have familiarized economic read-
ers with t!ie terms " credit economy," " money
economy " (Geldwirtschaft), and " natural econ-
omy " (Naturalwirtschaft), the later-modern
scheme of economic life being cbaractfirized as
a " credit economy." What characterizes the
early-modern scheme, the " money economy," and
sets it off in contrast with the natural economy
(diatribiitiou in kind) that went before it in
WestrEuropean culture, is the ubiquitous resort
to the market as a vent for products and a
source of supply of goods. The cbaracteristic
feature of this money economy is the goods mar-

'mat'sinat + -( — J>niat, in which mat' is the current valiu of

the material eqniproent, aa increnBed (over mat) by the competitJ*«

demand for equipment due to the credit element — -. One of the nib-

Btantlal secondary beneUta to be noted as flowing from thue modern
busiuess expedients [a the effect of corporation GoaDce upon the aggre-
gaie nominal wealth of the community. A given community, poBsegHOd
of a given complement of material wealth, is richer in capital if a large
propori.ion of ilA industrial equipment is capitalized and managed by
eoTporstion methods, quite apart from any increase in the material
items of which the community is posaeBsed, (Cf. Taelfih Centiu of
the United Stales, "Manufactures," pt. I. p. xcvi.) Wealth may in
this way be increased (about twofold on an average), inexpensively,
by the simple expedient of incorporating the community's business
concerns in the form of joint-atock companies. The more highly in-
volved and the more widely extended the corporation financiering is,
the richer, in statiatical terms of capital, is the community, other things
equal. Among Ihese other things ai'e the RlBt(^riRl Facta of the cui«.

MODERN BUSINESS CAPITAL

ket. About the goods market business and in-
dustrial interests turn in early modem times ;
and to this early-modern system of indiistrial
life the current doctrines of political economy are

—adapted, as indicated above.

I The credit economy — the scheme of economic
life of the immediate past and the present — has
made an advance over the money economy in
the respect which chiefly distinguishes the latter.
The goods market, of course, in absolute terms
is still as powerful an economic factor as ever,
but it is no longer the dominant factor in busi-
ness and industrial traffic, aa it once was. The
capital market has taken the first place in this re-
spect. The capital market is the modem economic
feature which makes and identifies the higher
"credit economy" as such. In this credit econ-
omy resort is habitually had to the market as
a vent for accumulated money values and a source
of supply of capital.'

Trading under the old regime was a traffic
in goods; under the new regime there is added,
as the dominant and characteristic trait, trading
in capital. Both in the capital and in the goods
market there are professional traders, as well as

' The commodities bought and sold in the goods market are the
nuioome ol a procen of production and are lueful for a material pur-
pose -. those boDght and oold In tbe capital marlcet are the outAome
. ol a process ol valuation and are luefal for purposes of pecuniary

buyers and sellers wlio resort to the market Ic
dispose of their holdings and to supply their needs
of what the market affords. In either class of
trading the ends sought by those engaged m the
husmess are generically the same. The endeavors
of those who are in the business of trading, who
buy in order to sell and sell in order to buy, are
directed to the pecuniary gain that is to be got
through an advanta^geous discrepancy between
the price paid and the price obtamed; but on
the part of those who resort to the market to
supply their needs the end sought is not the same
in the two cases. The last buyer of goods buys
for consumption, but the last negotiator of capital
buys for the sake of the ulterior profit ; in sub-
stance he buys in order to sell again at {Ui
advance. The advance which he has in view
is to come out of the prospective earnings of the
capital for which he negotiates, WTiat he has
in view as his ulterior end in the transaction
is the conversion of the values for which he
negotiates into a larger outcome of money values,
— whatever process of production and the like
may intervene between the inception and the
goal of his traffic.'
/ The value of any given block of capital, therefore,
turns on its eaming-capacity ; or, as the mathemat*
ical expression has it, the value of capital is a func-

j 1 Cf. Man, KttjiHal (4t!i cd.), bk. L oh. IV.

MODEKN BUSINESS CAPITAL

153

■ ■'Of its mechanical efficiency. It is only more re- i
motely, and through the mediation of the earning-
capacity, that these last-named factors sensibly affect
the value of the capital. This earning-capacity of
capital depends in its turn, not so much on the me-
chanical efficiency of the valuable items bought and
sold in the capital market, as on the tension of the
market for goods. To recur to an expression already
employed in a aimilar connection, the question of
earning-capacity of capital relates primarily to its
effectiveness for purposes of vendibility, and only
at the second remove to its effectiveness in the way
if material serviceabUity. But the earning-capac-
ity which in this way affords ground for the valua-
tion of marketable capital (or for the market
capitalization of the securities bought and sold) is <
not its past or actual earning-capacity, but its
presumptive future earning-capacity; so that the

■ Effective capital = current market value of nominal capital =
preeninpiive earning capacity x purcbaso period, neglecting fortuitona
and incalculable Items which may aftect any given case.

If nominal capital = cap, efiective capital = cap', presumed aoDaal
eamingi = ea', and the purcliaae period of capitaliied property
fre«r»' purchaael = yp = , wehavecap Jcap'

tt rate per a:

'"""S-

r ^iIb equation between cap' and ea' is diaturbed by the preaence In

f giTcn case of variable factors which cannot be included in the

m, bnt it remains true after oU quallflcatian baa been mads

loi THE THEORY OF BUSINESS ENTERPRISE

HuctuatioDB in the capital market — the varying
market capitalization of securities — turn about
imagined future events. The forecast in the case
may be juoie or lesa sagacious, but, however saga-
cious, it retains the character of a forecast based
on other grounds besides the computation of past
results.

All capital which is put on the market is in this
way subjected to an interminable process of valua-
tion and revaluation — i.e. a capitalization and
recapitalization — on the basis of its presumptive
earning-capacity, ^vhe^eby it all assumes more or
less of a character of intangibility. But the most
elusive and intangible items of this marketable
capital are, of course, those items which consist of
capitalized good-will, since these are intangible
goods from start to finish. It is upon this factor
of good-will in capital that a change in presumptive
earning-capacity falls most immediately, and this
factor shows the widest and freest market fluctua-
tions. The variations in the capitalized value of
merchantable good-will are relatively wide and
unstable, as is shown by the quotations of conunon
stock.

In the capital market the commodity in which
trading is done, then, is the capitalized putative
earning-capacity of the property covered by the
securities bought and sold. This property la in part
tangible, in part intangible, the two categories

MODERN BUSINESS CAPITAL

loy

ig seldom clearly distinguishable. The items
lUght and sold are put into merchantable form
ly being standardized in terms of money and 6ub-
jvided into convenient imaginary shares, which
■greatly facilitates the traffic. The earning-capac- \
ity on which the market capitalization runs and \
ut which the traffic in merchantable capitaly
•ns is a putative eaming-capacity. It follows
,t this putative earning-capacity of a given
flock of capital, as it takes shape in the surmises
outside investors, may differ appreciably from
le actual eaming-capacity of the capital as known
its managers ; and it may readily be to the
Iter's interest that such a discrepancy between
actual and imputed eaming-capacity should arise.'
When, e.g., the putative eaming-capacity of the
capital covered by a given line of securities, aa
shown by the market quotations, rises appreciably
ive what is known to its managers to be its
;ual earning-capacity, the latter may find their
'advantage in selling out, or even in selling short ;
while in the converse case they will be inclined to
buy. Moreover, putative eaming-capacity is the
lontcome of many surmises with respect to pro&-
:tive earnings and the like ; and these surmises

1 Something of thU kind U the usual ground o! the obatjnate rMist'
ance which most businesa men opposs to publicity of aceoants. Id
linM of btwiiiesa. as, e.{r.. railroading, in which accounts are readily
kiid effecta&llf sopbiaUcated ("doctored"), the objec Lions to publicity
u« commoalj- Icsh

Btttu

^adv
whi
buy

^■>(nit<

156 THE THEORY OF BUSINESS ENTERPRISE

will vary from one man to the nest, since they
proceed on an imperfect, largely conjectural, knowl-
edge of present earning-capacity and on the still
more imperfectly known future course of the goods
market and of corporate policy. Hence sales of
securities are frequent, both because outsiders vary
in their estimates and forecasts, and because the
information of the outsiders does not coincide with
that of the insiders. The consequence ie that a
given block of capital, representing, e.g., a eon-
trolling interest in a given industrial enterprise,
may, and in practice it commonly will, change
owners much more frequently than a given indus-
trial plant was wont to change owners under the
old regime, before the fully developed corporation
finance came to occupy the field of industrial
business.'

It follows, further, that under these circum-
stances the men who have the management of such
an industrial enterprise, capitalized and quotable
on the market, will be able to induce a discrepancy
between the putative and the actual eaming-capao-
ity. by expedients well known and approved for
the purpose. Partial information, as well as mis-
information, sagaciously given out at a critical
jimcture, will go far toward producing a favorable
temporary discrepancy of this kind, and so enabling
tlie managers to buy or sell the securities of the

1 rf., e.y., F.beinladl, Deutsehe EapUalamarkt.

MODEKN BUSINESS C'AI'IT.VL

concern with advantage to themselvea. If they
! alirewd business men, as tliey commonly are,
tey will aim to manage the affairs of the concern
pith a view to an advantageous purchase and sale
[ its capital rather than with a view to the future
jsperity of the concern, or to the continued ad-
Btageous sale of the output of goods or services
1 by the industrial use of this capital.
tat is to say, the interest of the managers of a
modem corporation need not coincide with the
permanent interest of the corporation as a going
concern ; neither does it coincide with the interest
which the coramuuity at large has in the efficient
management of the concern as an industrial enter-
prise. It is to the interest of the community at
large that the enterprise should be so managed as
to give the best and largest possible output of
goods or services ; whereas the interest of the cor-
poration as a going concern is that it be managed
with a view to maintaining its eflSciency and selling
as large an output as may be at the best prices
obtainable in the long ran ; but the interest of the
managers, and of the owners for the time benig, is
L to 80 manage the enterprise as to enable them to
jibuy it up or to sell out as expeditiously and aa
advantageously as may be. The interest of the
community at large demands industrial efficiency
and serviceability of the product; while the busi-
rSess interest of the concern as such demands ven-

^^iKSB luwrt;

THK THEORY OF BUSINESS ENTERPRISE

dibility of the product ; and the intcreat of those
men who have the final diacretion in the manage-
ment of these corporate enterprises demands vendi-
bility of the corporate capital. The community's
interest demands that there should be a favorable
difference between the material cost and the mate-
rial serviceability of the output ; the corporation's
interest demands a favorable pecuniary difference
between expenses and receipts, cost and sale price
of the output ; the corporation directorate's interest
is that there should be a discrepancy, favorable for
purchase or for sale aa the case may be, between the
actual and the putative earniug-capacity of the cor^
poration's capital.
— It has been noted in an earlier chapter that
there unavoidably results a discrepancy, not uncom-
monly a divergence, between the industrial needs
of the community and the business needs of the
corporations. Under the regime of the old-faah-
ioned " money economy," with partnership methods
and private ownership of industrial enterprises, the
discretionary control of the industrial processes is
in the hands of men wliose interest in the industry
is removed by one degree from the interests of the
community at large. But under the regime of the
more adequately developed " credit economy," with
vendible corporate capital,' the interest of the men

' The capital of any induatrl&l conceiTi under tbe -'money econ-
omy " is, of course, also vendible, but wilb relative difficulty ; wbUo

MODERM BUSINESS CAPITAL

159

Bwbo hold the discretion in industrial affairs is
removed by one degree from that of the concerns
under their management, and by two degrees from
the interests of the community at large.

The business interest of the managers demands,
not serviceability of the output, nor even vendi-
bility of the output, but an advantageous discrep-
ancy in the price of the capital which they manage.
The ready vendibihty of corporate capital has in
great measure disaociated tlie business interest of
the directorate from that of the corporation whose

BITS they direct and whose business policy they
delate, and has led them to centre their endeavors
upon the discrepancy between the actual and the
putative earning-capacity rather than upon the per^
manent efficiency of the concern. Their connection
with the concern is essentially transient ; it can be
terminated speedily and silently whenever their
private fortune demands its severance. Instances
are abundant, more particularly in railway man-
agement, where this discrepancy between the busi-
ness interest of the concern and the private
business interest of the managers for the time
being- has led to very picturesque developments,
such as could not occur if the interesta of the man-

ibe nadier vendibility of modem corporate capital is ao charMiMrisUc
kod conae^Dentlkl a factor In biiHiness and contrasta bo broadly with
the old-faahloned bualneu methods tbnt it may fairly be spokea of aa
Tcndibility par excetltnce. The "holding company" 1b the mature
ckrelopmeut of this tnOlc In vendible capital in Indanrlal biuineaa.

160 THE THEORY OF BUSINESS ENTEKl'KISE

agement were bound up with those of the corpora-
tion in the manner and degree that once prevailed.
The fact is significant that the more frequent and
striking instances of such management of corpo-
rate affairs for private ends have hitherto occurred
in railroading, at the same time that the methods
and expedients of modem corporation finance have
also first and most widely reached a fair degree of
maturity in railroading. It holds out a suggestion
as to what may fau-ly be looked for when corpora-
tion finance shall have made itself more thoroughly
at home in the *' industrials " proper. Indeed, the
field of the " industrials " is by no means barren of
instances comparable with the maturer and more
sagacious railroad financiering.^

The stock market interest of those men who
have the management of industrial corporations
is a wide and multifarious one. It is not confined

' It may be noted, by the wny, that the question of the ti
(apoken of on p. 6S above) becomes, under the circiUDStancea of tho
modem oorporatioti finance, in great pari a question of the interral
between the purchaae and sale of the capital engaged in Indnatrj on
the one hand, and of the magnitude of tbe discrepancy between actual
aod putative earning-capacity on the other hand, rather Uiait a que«-
tioQ of the period uf Uie industrial process and the magnitude of the
output and its price. Tlie formula there shown becomes : —
tomoTer = °'P''^' / ^^ct"'! earninp-capacit y

= putative eamiiig-capacity — actual eamiiig.<!apaclty ]i
in which capital ia the amount of Uie operator's investment in the
concern's securities, tbe time is tbe interval between purchase and sale
of the Becuritles, and the putative eaminiz-cHpacity is taken to eioeed
like acluAl eamiiig-capftclq' by ta indetonniiiUe frsotlon of Uw Utter.

ing
liiii
of

pBo

MODERN BUSINESS CAPITAL

to the profitable purchase and sale of properties
whose management they may have in hand. They
are also interested in making or marring various
movements of coalition or reorganization, and to
ulterior end it is incumbent on them to '* ma-

ipulate " securities with a view to buj'ing and sell-
ing in such a mamier as to gain control of certain
lines of securities.' Hence it is a rule of this class
of business traffic to cultivate appearance, — to

.■void, or sometimes to court, the appearance of sin.
that under this leadership the course of indua-
triiil affairs is, in great measure, if not altogether,
guided with a view to a plausible appearance of
prosperity or of adversity, as the case may be.
Under given circumstances it may as well become
the aim of men in control to make an adverse
showing as a favorable one. The higher exigencies
of the captain of industry's personal fortimes, as
distinct from tliose of the corporation controlled by
him, may from time to time be best served by
an apparent, if not an actual, mismanagement of

idustrial affairs. A convincing appearance of de-
le or disaster will lower the putative earning-
caiKicity of tlie concern below its real eaming-capac-
ity and so will afford an advantageous opportunity
for buying with a view to future advance or with
a view to strategic control. Various other expedi-
ents looking to the Hke outcome are well known to

1 Ct Chapler UI. above.

an i
Kpndti
Bniiv

162 THE THEORY OF BUSINESS ENTERPRISE

the craft, besides ho?ia fide mismanagement. A
given line of securities may be temporarily de-
pressed by less heroic tactics ; but the point in
question here is the fact that under this system of
corporation finance the affairs of the corporation
are in good part managed for tactical ends which
are of interest to the manager rather than to the
corporation as a going concern.

What was said in speaking of credit extension
without a determinate time interval ' applies to
this class of business, with a slight change of
phrase. In this higher development of corporation
finance, in the manipulations of vendible capital,
the interval of the turnover spoken of above be-
comes an indeterminate factor. The gains of the
business come to have but an uncertain and shifty
relation to the lapse of time and cannot well be
calculated per cent, per time-unit. There is, there-
fore, on these higher levels of business management,
properly speaking no ascertainable ordinary rate of
earnings. The capital which may be distinctively
regarded as operative in the business of manipula-
tion, the valuable items specifically employed in the
traffic in vendible corporate capital, is made up of
the operator's good-will and his financial solvency.
Solvency on a large scale is requisite to carrjdng
on traffic of this class, but the collateral on which
this extensive solvency constructively rests is to
1 Cf. Chapter V, above.

^ MODERN BUSLNESS CAPITAL 163

but a partial extent drawn into the buainess as a
basis for an actual credit extension. What counts
in the case is the solvency of the operator rather
than an outright resort to the credit extension

B which this solvency might afford. The working
capital involved in these transactions is accord-
ingly of a peculiarly elusive character, and the
time element in the use of this capital is hard to
determine, if such a time element can properly be
said to enter into the case at all.

More in detail, the business man in pursuit of
gain along this line must, in the ordinary case, be
possessed of large holdings of property, this being
the basis of the solvency necessary to the business.
These holdings are commonly in the form of securi-
ties in the concern whose vendible capital is the
Brtobject of his traf&c, as well as in other corpora-
HKmkis. These securities represent capital, tangible
and intangible, which is already employed in the
ordinary business of the concern by which they
have been issued ; the capital, therefore, is already
in use to the full extent and is presumably jielding
the ordinary rate of earnings. But the solvency
for which the ownership of this capital affords a
basis may further be useful in enabling the owner
to carry on a traffic in vendible corporate capital
without withdrawing any appreciable portion of
his holdings from the lucrative investments in
hich they have been placed. lu other words, he

llj-i THE THEORY OF BUSINESS ENTERPRISE

is able, under modern circumstances, to make a
secondary use of bis investments for the purpose of
trading in vendible corporate capital; but this
secondary use of investments bears no hard and
fast quantitative relation to the investments in
question, nor does it in any determinate way inter-
fere with the ordinary employraeat of this invested
capital in the commonplace conduct of the corpora-
tions' business traffic. The capital employed, as
well as the potential credit extension which it
affords for the purposes of this higher business
traffic, is therefore in a peculiar degree intangible,
and, in respect of its amount, highly elusive.

Much the same is true of the good-will employed
in this traffic. It is also in good part good-will
which already serves the purposes of the common-
place business traffic of the corporations on whose
securities the business man in question rests his
solvency. So that in tliis higher business traffic
the good-wUl engaged is also here turned to a
secondary use. The business economies which are
in this way made practicable by a reduplication of
uses and made to inure to the greater business
men's profit are of great magnitude ; but the mag-
nificent additions which are in tliia way made to
the business community's capitalizable forces need
scarcely be dwelt on here.

The elusive and flexuous character of the ele-
ments of wealth engaged, as well as the absence of

MODERN BUSINESS CAPITAL

16-5 I

I ascertainable ordinary rate of eaminga in this
'line of business, has led economists to speak of
this traffic in vendible capital as a " speculative "
basiness.' The mere buying and selling of stocks .
hy outsiders for a rise or a decline is of course a
■culative business ; it is a typical form of specu-
' lative business. But in so far as such buying and
selling is carried on by the managers of the corpo-

I rations whose securities are the subject of the traffic,
jfend especially where the securities are bought and
pold with a view to the control of the corporations
Id question and their management for private,
^tical ends, a characterization of the business as
"speculative" is inadequate and beside the point.
This higher reach of corporation financiering has
little if any more of a speculative character than
what belongs to t!ie commonplace business man-
agement of any industrial enterprise. In all busi-
ness enterprise that stands in relations with the
market and depends on vendibility of its output
there is more or less uncertainty as to the out-
In this sense all industrial business, a^ well
B commercial business, has something of a specu-
lative character. But it is little to the purpose on
at account to lump industrial enterprises and

^^.therc
^feomc
^Hwco

^Bativi
Hhat

• Cf. Emery, " Place of the Speculator ii
UoD," Proeeedings of the twelfth annual
Economic AAsocialion; alxo " Discitsaion,'

^K * Well ibowii In Mr. Em.

the Theory of DiatHbQ- I

leeting of tbe American I

followlog Mr. Emery's 1

nbove. M

166 THE THEORY OF BUSINESS ENTERPRISE

corporation financiering together as " speculative
business " and deal with them as if this were their
most salient and consequential bearing. What
speculative risk there is in these lines of busineas
is incidental, and it neither affords the incentive to
engaging in these pursuits nor does it bound the
scope of their bearing upon economic affairs. The
speculative risk involved is no greater, relatively to
the magnitude of the interests involved, in this
larger trafiBc that deals in vendible capital than it
is in the ordinary lines of business traffic that deal
in vendible products. In both cases there may be
speculation, but in both cases it is a side issue.
Indeed, as near as one may confidently hold an
opinion on so dark a question, the certainty of
gain, though perhaps not the relative amount of it,
seems rather more assured in the large-scale ma-
nipulation of vendible capital than in business
management with a view to a vendible product.

What may obscure the question is the fact that
the manipulations involved in this traffic in vend-
ible capital commonly impose increased risks upon
the business concerns engaged in industry — the
corporations whose capital is involved, as well as
other firms. Ttie everyday business of the corpo-
rations whose securities are involved, as well as of
other business concerns engaged in rival or related
lines of industry, is rendered more hazardous than
it might be in the absence of this financiering

MODEEX BUSINESS CAPITAL

traffic in vendible capital. The manipulations carry

Izisk, not 80 much to the manipulators as such,
Bfl to the corporations whose properties are the
Vabject of manipulation; but since the manipula-
tors commonly own but a relatively small propor-
tion of the properties involved or touched by their
manipulations, the risks which arise do not fall
chiefly on them. To this is to be added, as of
prime importance for the whole question, that the
manipulators have the advantage of being able, in
great part, to foresee the nature, magnitude, and
incidence of the risks which they create. Rightly
Been, this, of course, goes to say that the increased
speculative risk due to the traffic in vendible capital
does not fall on that traffic, but on the business
enterprise engaged about the output of vendible
goods. The traffic in vendible capital is not with-
out its speculative risks, but the risks which it
creates fall with relatively greater weight upon the
business men who are not immediately concerned
in this traffic. Indeed, so secure and lucrative is
this class of business, that it is chiefly out of gains
accruing, directly and indirectly, from such traffic
in vendible capital that the great modem fortunes
are being accumidated ; and both the rate and the
magnitude of these accumulations, whether taken
absolutely or relatively to the total increase of
wealth, surpass all recorded phenomena of their
^^^ind. Nothing so effective for the accumulation

168 THE THEORY OF BUSINESS ENTEKl'KISE

of private wealth is known to the history of
human culture.

The aim and substantial significance of the
" manipulations " of vendible capital here spoken
of is an ever recurring recapitalization of the prop-
erties involved, whereby the effective capitaliza-
tion of the corporations whose securities are the
subject of the traffic ia increased and decreased
from time to time. The fluctuations, or pulsations,
of this effective capitalization are shown by the
market quotations of the securities, as noted above.'
It is out of these variations in capitalization that the
gains of the traffic arise, and it ia also through
the means of these variations of capitalization that
the business men engaged in this higher finance
are enabled to control the fortunes of the corpora-
tions and to effect their strategic work of coali-
tion and reorganization of business enterprises.
Hence this traffic in vendible capital is the pivotal
and dominant factor in the modern situation of
business and industry.''

1 p. 164.

' Ah ifl true of good-will anrt credit extensions genorallj, bo with
respect to the good-will and credit strength of these greater bnai-
nesa men ; it affords a diRcrential advantnge and j^ves a differential
gain. In the trafHc of corporation finance this ditferentlal ^in is
thrown imuiediftUly into the fonn of capital and bo is added to the
nominal capitalized wealth of the community. What it glveB to lU
holders in this capitnttKed form is a claim to a proportionate share in
the existing wealth. If other tilings are mtpposed to remain
(which may not be the caiMs), the claim go enforced by the great finan'
cieis on (he basis of gowl-wili und credit extension deducts that much
from the wealth held by tlie rest, tlie previous liolilers, aa counted in

IMODEEN BUSINESS CAPITAL 169

It baa been noted above tbat wbat may be called
me working capital on which this higher corpora-

lemiB of muerial wealth ; as csountad in terma al monej Talue. of
coune, ibe holdingB oE previous boldere do (or need) not suffer, sines
Ibe new claima take the (orm ot an addition to the number of capital-
iied value units, although the iucreased aggregau number of Talus
units coustitules a claim on the same aggregate mass of wealth aa
before. The pro rata reduction of the material magnitude of the
several shares of wealth is not felt as an impoTerisbmeut, because it
does not take the form of a reduction of the nominal value of the ihares.

This capitalization of the gains arising from a differential advantags
reeulis in a large "saving" and iocrease of capiial. The wealth so
drawD in b; the financiers (entrepreneurs) is nearly all held as capital,
very little of It being consumed in current expenses of living. It
has been cogently argued tbat the profits of the undertaken I* the
chief and normal source of capitalized savings in the modem situation,
and the method here indicated seems to be the method by which Boob
saving is chiefly effected. An extremely so^estlve discussion ot the
undertaker's gains in this connection occurs in a paper by L. V, Birck
("Driftsfaerrens Gevinst"), read before the Danish Economic Asso-
ciation, December 1901. More immediately to the point still Is V.
Schon's discussion of Mr, Birck's paper. (See yationalSkonomuk
Tidttkrift. January-February 1902, pp. 76, T8-B0.) J. B. Clark, in
lectures hitherto unprinted, follows a line of analysis somewhat closely
parallel with Scbou. though not carried to quite the same length.

This process of combined recapitalization and saving may be stated
formally as follows : The initial value of the properties submitted for
coalition and recapitalization, cap, is in the normal case augmented by
the increment A, making the effective value of the properties = cap + A,
m effective units, U,- This augmented effective value of the properties
= (7.(cap + &) is capitalized at a nominal value ot cap'= [/^(cBp + A),
in nominal units, [7., nominally equivalent to ff,. In the recapitali-
sation the number of units ot capitalization Is increased by an element
of intangible asseU aaigned the owners on account of a presamed
increase ot eamlng-capacity due to the coalition. This element of
good-will due to coalition may be called co. Further there Is added
ihe bonus of the promoter, taken as a block ot stock in the new capi-
ttliEatioD, pro. Hence (7j;cap') * Ki(cap 4- A)'='Ki(cap -Hco -H pro),
P, (pro) ■> P. (cap'— cap — co)^(/,(a — co) is evidently aeacnre gain
to the promoter of 17,(A — co), which Is a traction of the effective value
f.(cap + A). This Is saved by bim In the capitalized form. The ac-
count of the former owners of the properties will then stand as follows ;

THE THEOHY OF BU.SIKRSS ENTEKPRISt

tion finance proceeds is made up, chiefly, of two
elements : the solvency (and consequent potential
credit) of the men engaged, and the " good-will "
of these men. Both of these elements are of a
somewhat intangible and elusive character, resting,
as they do, somewhat indirectly and shiftily on
elements already elsewhere engaged in business
enterprise. The solvency in question re-sts in large
part on the capital of the corptjrations whose capi-
talization is .subject tu the fluctuations induced by
the traffic in vendible capital. It is therefore
necessarily a somewhat indeterminate and unstable
magnitude. To this is to be added the " floating

y,(cap + A~pro)^(/,(cap) accordiug as t7, A ^ CCpro). The noml-
ual gain of the awiirrB, to, mny or may Dot be a lexl gain acconlin|t
as the event may prove tlint Uie |iromoiev'« bomia haj not or hu
absorbed the eutire effective augmentation of value, A, due to ths
coalition ; it ie Uiererui« a problematical gain, which may or may uoi,
in the e^ent, prove to be an effective element of capitalized savings.

The oonstiiution of d will decide wliat is the ultimate source of the
savings effected by tills transaction. If S conuisis entiitly of ecouomiM
of production, thp capitalized savings held by lb« promoter and former
owners as a result of the traiusaction repre.ient new values added to, or
Mared Ui. the aggregate wealth of the community. If A consiHta entire! j
of good-will In the shape i.t monopoly advantage, the saving is eSecled
at the cost of the cummanity and for the benefit of the promoter and
owners ; it is then an involuntary or sabconscioua saving on the part ot
the cominuniiy, whereby a part ot the commtuiity'd wealth at lar^
liaases into the hands of the recapitalized corporation. Where A la
made up of these two constitnents together, the result, as regards th»
present point, should be plain without discussion. If, on the oibei
hand, A = 0, so that cap' = cap, then the promoter's savings, pro, are
wK-nred at the cost of the former owners; K.(cap' - pro) = tf,(ciip
+ fA = 0) - pro)=' (/.(cap - pro). Wliereaa if Oifpro) = CfA).
U.(co) = 0, leaving the owners without effeollve profit or toss in spile
• <r ni>y nominal Inereue of tha capitalitatiou.

HODEKN BrsCTESS CAPITAL

tapital** and h*"fcT"g cspital at the di^weal of
these men. If a oommoihflemM riev be taken of
the business, the good-wiD o^aged mnrt also be

added to the usete. There is mTolvcd a v«ry con-
siderable and very vahiable body of good-will.
appertaining to the financiers engaged and to the
financing firms associated with them.' This good-
will and this solvencv is capital, for the pnrpose in
ihand, aa effectually as the good-will and securities
Incorporated in the capitalization of any coipora-
tion engaged in industrial business.

But hitherto this particular category of good-
will has not been formally capitalized. There
may be peculiar difficultie-i in the way of reducing
this good-will to the form of a fund, expresMng it
in terms of a standard unit, and so converting it
into quotable common stock, as has been done with
the corresponding good-will of incorporated indus-
trial enterprises. So also as regards the body of
solvency engaged, — the potential credit, or credit
capacity, of the promoters and financiers. Perhaps
this latter had beet also be treated as an element

• " Good-will " in this field of enterprise most IreqneDtlT l»kM lh«

in o! a Urge abQity to help or binder other financiers and financtiift

uee In any similar manoiuvrea in which thoy may be eng«iceJ. "r

ability to put Ihem in the way of lucrative llniuicinR imnsjicliuii''.

Hi6 piild of financiers is commonly split up into nioro or Ibu well-

deflned (actions. eacU comprising an eitensive ramiflcation ol lliiaDCing

M and flnanciers furthering one another's endeavors uodt^r more

or leas «etlled working arrangements. Tliest workinB armiigcmuiiUi

a large part uf the Hnauuk'rii' " goml-wilL"

1/2 THE THEORY OF BUSINESS ENTEKPEISE

of good-will ; it is difficult to handle under any
other, more tangible^ conception. It may be dif-
ficult to standardize, fimd, and capitalize these
unstable but highly efficient factors of business
enterprise ; but the successful capitalization of
good-will and credit extensions in the case of the
modern industrial corporations argues that this
difficulty should not be insurmountable in case an
urgent need, — that is to say, the prospect of a
profitably vendible result, — should press for a
formal capitalization of these peculiar elements of
business wealth. There can be no question, e.g.,
but that the good-will and large solvency belong-
ing to such a firm as J. P. Morgan and Company
for the purposes of this class of business enterprise
are an extremely valuable and substantial asset, as
is also, and more unequivocally, the good-will of the
head of that firm. These intangible assets, imma-
terial goods, should, in all consistency, be reduced
to standard units, funded, issued as common stock,
and so added to the statistical aggregate of the
country's capitalized wealth.

It is safe to affirm that this good-will of tlie
great reorganizer has in some measure entered in
capitalized form into the common stock of the
United States Steel Coi-poration, as also into that
of some of the other great combinations that have
latterly been effected. The "good-will" of Mr.
Carnegie and liis lieutenants, as well as of many

MODERN BUSINESS CAlTiAL

173

r other large business men counected with the steel
industry, has also no doubt gone to awell the cap-
italization of the great corporation. But good-will
on this higher level of business enterprise has a
certain character of inexhaustibility, so that its use
and capitalization in one corporation need not, and

I indeed does not, hinder or diminish the extent
to which it may be used and capitalized in any
other corporation.' The case is analogous, though
BCarcely similar, to that of the workmanlike or
artistic skill of a handicraftsman, or an artist,
which may be embodied in a given product with-
out abating the degree of skill possessed by the
• workman. Like other good-will, though perhaps
in a higher degree of sublimation, it is of a spirit-
ual natiu^, such that, by virtue of the ubiquity
proper to spiritual bodies, the whole of it may
undividedly be present in every part of the various
structures which it has created. Indeed, the fact
of such good-will having been incorporated in
capitalized form in the stock of any given coipora-

ttion seems rather to augment than to diminisii the
amount at which it may advantageously be cap-
italized in the stock of the next corporation into
which it enters. It has also the correlative spirit-
^_ ual attribute that it may imperceptibly and inscru-

F . > Thii category of good-will atanda la a relation to the creation of
WBdIble capital similar to that wbich the oorpotaie good-will of an
Indutrlal bualoeaa conceru bears to the creation of vendible products.

174 THE THEORY OP BUSINESS EJJTERPKH

tably withdraw its animating force from any one
of its creatures witliout thereby altering the
material circumstaiicea of the corporation which
anffera such an intangible shrinkage of its forces.
There can be no question but that the good-will
of the various great organizers and their financier-
ing houses has repeatedly been capitalized, prob-
ably to its full amount, m the common stock of
the various corporations which they bave created ;
but taken in the sense of an asset belonging to
the financing house aa a corporation, it is not
known that this item of unmaterial wealth has yet
been formally capitalized and offered in quotable
shares on the market or included in the schedules
of personal property.'

ui es II

The sublimation of business capital that
been going forward in recent times has grave
consequences for the owners of property as well
as for the conduct of industry. In so far aa
invested property is managed by the methods of
modem corporation finance, it is evident that the
management is separated from the ownership of

' ParentbeUctilly it may be remarked thai the failure to cnpilalize
such iUms of good.will 1h likely lo Involve a virtual eTaslon of the tm
on personal properly, and may, therefore, be questionable on moral
gruunda.

Tbe caae of J. P. Morgan and Company is. of course, not here died aa
being a unique or pecullnr iuBtaace, hut simply as a typical and strik-
ing illuatration of what bappeos SJid of what might be accomptlshed
in a number of large and very consequential cases of the same class.

the property, more and more widely as the scope
of corporation finance widens. The discretion, the
management, lies in the hands of the holders o£
the intangible forms of property ; and with the
extenaiou of corporation methods it is increasingly
true that thia management, again, centres in the
hand^ of those greater business men who hold
large blocks of these intangible assets. The reach
of a business man's discretionary control, under
corporation methods, is not proportioned 'simply to
the amount of his lioldiiigs. If his holdings are
relatively small, they give him virtually no discre-
tion. Whereas if they are relatively large, they
may give him a business discretion of much more "

■ Uian a proportionate reach. The effective reacB
of a business man's discretion might be said tol
increase as the square of his holdings ; although
this is to be taken as a suggestive characterization I

I rather than as an exact formula. ~"~^

Among the holdhigs of industrial property that
count in this way toward control of the business I
Ktuation, the intangible iissets (represented by,
common stock, good-will, and the like) are chiefly |
of consequence. Hence follow these two results: \
the fortunes of property owners are in large ,
measure dependent on the discretion of others —
the owners of iutaugible property ; and the man-
agement of the industrial equipment tends strongly i /
to centre in the hands of men who do not own the ■'^

176 THE THEORY OF BUSINESS ENTERPRISE

industrial equipment, and who have only a remote
interest in the efficient working of this equipment.
The property of those who own leas, or who own
only material goods, is administered by those who
own more, especially of immaterial goods ; and the
material processes of industry are under the control
of men whose interest centres on an increased
value of the immaterial assets.'

1 Thit dlHaociation ot the businesB control from workmanlike eC6-
clency and from immedUM contact wlt.b or ownership of the indiutrial
plftBt givea the existing situation a enperficial resemblance to tbe feudal
HJHtem, in bo far as toucbea tbe ImmaterlaKt; of tbe captain's connec-
tions nith tbe everyda; life and Interests of the community of whose
affairs be is master. It giv'ea a certain plauaibillty to tbe att^mpled
interpretation of latter-day economic developments in feudAlifltlcterm&
—See Qhent, Our BmevoleM Ftudalitm.

CHAPTER Vn

THE THEORY OF MODERN WELFARE

• Before business principles came to dominate
everyday life the common welfare, when it was not
a question of peace and war, tui-ned ou the ease
and certainty with which enough of the means of
life could be suppUed. Since business has become
the central and controlling interest, the question of
welfare has become a question of price. Under the
old regime of handicraft and petty trade, dearth
(high prices) meant privation and might mean
famine and pestilence ; under the new regime low
prices commonly mean privation and may on
occasion mean famine. Under the old regime the
question was whether the community's work was
adequate to supply the conamunity's needs ; under
the new regime that question is not seriously
entertained.

But the common welfare is in no less precarious
a case. The productive efficiency of modern in-
dustry has not done away with the recurrence of
hard times, or of privation for those classes whose
assured pecuniary position does not place them
above the chances of hard times. Distress may

17fi THK THEORY OK liUSINEftS ENTICRI'RISK

not be 8u exireine iii modei'ii industrial commu-
nities, it does not readily reach the famine mark;
hut such a degree of privation aa is implied in the
term " hard times " recurs quite as freely in
modern civilized countries as among the indus-
trially less efficient peoples on a lower level of
culture. The oscillation between good times and
bad is as wide and as frequent as ever, although
the average level of material well-being nins at a
higher mark than was the case before the machuie
industry came in.

This visible difference between the old order and
the new is closely dependent on the difference
between the purposes that guide the older scheme
of economic life and those of the new. ( Under the
old order, industry, and even such trade as there
was, was a quest of livelihood; under the new order
industry is directed by the quest of profits. For-
merly, therefore, times were good or bad according
as the industrial processes yielded a sufficient or
an insufficient output of the means of life. Lat-
terly times are good or bad according as the pro-
cess of business yields an adequate or inadequate
rate of profits. The controlling end is different in
the present, and the question of welfare turns on
the degree of success with which this different
ulterior end is achieved. Prosperity now means,
primarily, business prosperity ; whereas it used to
mean industrial sufficiency!

THE THEOKY

MODERN WELFARE 17'.)

I A theory of welfare which shall account for the
enomena of prosperity and adversity under the
modem economic order must, accordingly, proceed
on the circumstances which condition the modern
situation, and need not greatly concern itself with
the range of circumstances that made or niari-ed
^^tiie common welfare under the older regime,
^Hiefore the age of machine industry and business
^BbnterpriBe.' Under the old order, when those in
whose hands lay the discretion in economic affairs
looked to a livelihood as the end of their endeavors,

I the welfare of the community was regulated " by
ttie skill, dexterity, and judgment with which its
^bor was generally applied." * What would mar
this common welfare was the occasionally disastrous
Itct of God in the way of unpropitiou.s seasons and
Ute like, or the act of man in the way of war and
untoward governmental exactions. Price varia-
tions, except as conditioned by these untoward intni-
aive agencies, had commonly neither a wide nor a
profound effect upon the even course of the cora-
inuuity's welfare. This holds true, in a general
kway, even after resort to the market had come
) be a fact of great unportance in the life of large
KB, both as an outlet for their products and as

> Soch a discussion as Patten's Thtory of Proiptrity nppliee to the
regime of " QUurai economy," and pana&bly also lo lLbI tj[ liaadicnft
and petty trade. Ijin doea rot seriniwly tiiuch ihp modern situation.
The like is true generally (or current diacussiona of this topic.
^^B lIV'i/fA o/\nlifmH, liilroduclion.

[

THE THEORY OF BCSINESS ENTERPRISE

a base of supplies of consumable goods or of raw
materials, — as in the better days of the handicraft
system.

Until the machine industry came forward, com-
merce (with its handmaiden, banking) was the
only branch of economic activity that was in any
sensible degree organized in a close and compre-
hensive system of business relations. " Business "
would then mean " commerce," and little else.
This was the only field in which men habitually
took account of their own economic circumstances
in terms of price rather than in terms of liveli-
hood. Price disturbances, even when they were
of considerable magnitude, seem to have had grave
consequences only in commerce, and to have passed
over without being transmitted much beyond the
commercial houses and the fringe of occupations
immediately subsidiary to commercial business.

Crises, depressions, hard times, dull times, brisk
times, periods of speculative advance, "eras of
prosperity," are primarily phenomena of business;
they are, in their origin and primary incidence,
phenomena of price disturbance, either of decline
or advance. It is only secondarily, through the
mediation of business traffic, that these matters
involve the industrial process or the livelihood of
the community. They affect industry because
industry is managed on a business foot.ing, in terms
of price and for the sake of profits. So long as

LTHE THEORY OF MODEBN WELFAUE
DeB8 enterprise habitually ran its course within
commercial traffic proper, apart from the industrial
process as such, so long these recurring periods of
depression and exaltation began and ended within
the domain of commerce.' The greatest field for

' TbU mcAna, in concrete temiB, prior to tbe rfgiiae of the machine
iD^uaCry. Since the coDiiog in of the machine, modem business enter-
priae has taken over the management of iodustr; ; that ia to say, indiis-
try has come to be managed by tlie method of investment for a profit —
by what is in aim and animus essentially the commercial method. As
ba« been remarked above, capital has become vendible in a decisive
d^ree. Tbe material factors engaged in industry, pariicularly in tbe
machine industry proper, are vendible in about the same (perhaps on
an average in a higher) degree as the material items handled by com-
mercial traffic are vendible. This is true of raw materials, labor
power, and industrial equipment, but It in peculiarly true of the indos-
trial equipment — the mechanical factors in the stricter aense. It is
in these meciianical appliances primarily, but in the other factors of
the machine industry in only a slightly lower degree, that the traffic
of Investment, and of purchase and sale connected with investment, is
particularly active. Within these wider limits a further limitation
may be made. " Vendibility " of all items involved is. as a broadly
general rule, carried to the highest pitch in those branches of industrr
that have to do with the production of "producer's goods." These
branches are at the same time, and partly in consequence of thia fact,
moK widely and intimately related lo other branches of industry than
are any other group of industrial processes that might be named. It
seems to be this extreme prevalence of vendibility, together with this
more far-reaching and more exacting articulation with the industrial
process at large, that chiefly gives substantial significance to a classi-
fication of these lines of industry as "Produktlvmittel-IoduBtrien" by
late German writers. There is, for business purposes, a diflerence
of degree, in both of the respects named, between this {ili-deSned)
group of industrial processes on the one baud, and the contrasted
group occupied with the production of consumption goods on tbe other
hand. The "productive-goods indiiBtrtea" uliow the modern indus-
trial and business traits in au accentuated form and force, and they
are, by consequence, in a strategetjcally primary position in the busl-
neai situation.

Ct,, t.g., A. Spielhoff. Jahrbiich f. Grsf.tsgtbung Vtrvsatlviig «.
l'olktcirUeh<ift,vo\.XXVl.litl\,2. -' VorbeinerkuDgeozueiuetTliPurie

182 THE THEORY OF BUSINESS ENTERPEISE

business pro6tB is now afforded, not by commercial
traffic in the stricter sense, but by the industries
engaged in producing goods and services for the
market. And the close-kuit, far-reaching articula-/
tioii of the industrial processes in a balanced syw
tem, in which the interstitial adjustments are mad«
and kept in terms of price, enables price disturB-
ances to be transmitted througtiout the industrial
community with such celerity and effect that la
wave of depression or exaltation passes over tae
whole commuuity and touches every class employed
in industry within a few weeks. And somewhat in
the same measure as the several modem industrial
peoples are bound together by the business ties of
the world market, do these peoples also share in
common any wave of prosperity or depression
which may initially fall upon any one member of
this business community of nations. Exceptions
from this rule, of course, are such periods of pros-
perity or depression as residt from local (material)
accidents of the seasons and the like, — accidents
that may inflict upon one community hardships
which through the mediation of prices are trans-
muted into gain for the other communities that
are not touched by the calamitous act of God to
which the disturbance is due.

der iJberprodncktion," mA vol. SSVII. pp. 34.'!-353 ; TugAn-BanmoT*-

aky, ThHirif ami (Imchi'-lile ihr llaiuIrhkriKnin England, pp. ^»-2S■,
L. Pohle, Feriixlisrhe tyirtsclmflskriaen, especially sec. II. with nub-

'fUE TIIEUUY OV MODEKN WELFARE 183

The true, or what may be called the normal,
arises, depressious, and exaltations in the business
world are not the result of accidents, such as the
fail iiFR of a crop. They ccmie in the regular course
^hf business. The depression and the exaltation are
^^b a measui'e bound together. In the recent past,
^Bnce depression and exaltation liave been normal
^Htetures of the situation, every strongly marked
^"period of exaltation (prosperity) has had its attend-
ant period of depression ; although it does not
seem to follow in the nature of things that a wave
H|| depression necessarily has its attendant reaction
^Bl the way of a period of business exaltation. Tu
^the recent past — the last twenty years or so — it
has been by no means anomalous to have a period
^of hard times, or even a fairly pronounced crisis,
Hpfthout a wave of marked exaltation either pre-
^BBding or following it in such close sequence as
conveniently to connect the two as action and re-
action. But it would be a matter of some perplex-
ity to a student of this class of phenomena to come
upon a wave of marked business exaltation (pros-
•erity) that was not promptly followed by a crisis
' by a period of depression more or less pro-
tounced and prolonged. Indeed, as the organiza-
i of business has approached more and more
irly to the relatively consummate situation of
•day, — say during the last twriily years of the
neteenth century, — periods of exaltation have,

. _/=

,c^ //4^ .-/ /

■ \ 184 THE THEORif OF BUSINESS ENTERPRISE

i on the whole, grown less pronounced and less fre-
quent, whereas periods of depression or " hard
timea" have grown more frequent and prolonged,,
if not more pronoimced. It might even be a ten-
able generahzatiou, though perhaps unnecessarily
broad, to say that for a couple of decades past the
normal condition of industrial business has been
a mild but chronic state of depression, and that
any marked departure from commonplace dull
timea has attracted attention as a particular case
calling for a particular explanation. The causes
which have given rise to any one of the more
pronounced intervals of prosperity dm-ing the past
two decades are commonly not very difficult to
trace ; but it would be a bootless quest to go out in
search of special causes to which to trace back each
of the several periods of dull times that account
for the greater portion of the past quarter of a
century. (Under the more fully developed business
sj'stem as it has stood during the close of the cen-
tury dull times are, in a way, the course of nature ;
whereas brisk times are an exceptional invention
of man or a rare bounty of Providence.

What current economic theory has to say on the
common welfare is more frequently found under
the caption of crisis and depression than in any
other one connection. And the theory of crisis
and depression has, as is well known, been one of
the less happy pasaagps in the economists' reper-

LTHE THEORY OF MODERN WELFARE 185
of doctrines. It has been customary to ap-
^»roach the problem from the side of the industrial
phenomena involved — the mechanical facts of
production and consumption ; rather than from
the side of business enterprise — the phenomena of
price, earnings, and capitalization. This untoward
accident of a false start is probably accountable for
the fact that no tenable theory of these phenomena
has yet been offered. The solutions attempted
have commonly proceeded by an analysis of indus-
trial life apart from business enterprise ; that is to
say, they have sought to explain the occurrence of
criaea mider that old-fashioned "natiu-al economy"
or "money economy" under which crises did not
normally occur.'

Taking as a point of departure the patent fact
that crises, depressions, and brisk times are in their
first incidence phenomena of business, of prices
and capitalization, an explanation of their appear-
ance and disappearance, and of their bearing upon
the cmnmon welfare, may be sought by harking
back to those business principles that underUe

' This is well eiemplifled in Tiigan-Baranowsky (IIaadfM-ri»e»).
who declu«B at the oulaet (p. IT) tliat money bd(1 price are negligible
factors tor Lbe purpose in band, lie thereby coiumilB himself to the
position that thc«e crises are pbenomenA nl the matcTlal processes
of economic life (production and consumption}, not of busineei ttafflc.
Uence the ultimate failure of tbia acute observer and theoreticiaii to
reach a (enable solution of tbe question. SubHtantlaily the same la
tme of Man, nbom Tu^an follons, though witli lai^n reservations.
(fit. Mari, KapUol, vol. 111. tli. .\V )

186 THE THEORY OF BUSINESS ENTERPRISE

modem capitalistic enterprise. An analysis of the
current, cornnion-sense business views of price and
investment should indicate the genesis and manner
of growth of these mass movements of the business
community, as well as the character of those cir-
cumstances which may further or inhibit such
movements. Business depression and exaltation
are, at least in their first incidence, of the nature
of psychological fact, just as price movements are
a psychological phenomenon.

I The everyday circumstances which condition
the modern business management of industry are
sufficiently well known, and they have already
been reviewed in some detail in earlier chapters;
but they may perhaps advantageously be outlined
again in so far as they bear immediately on the
question in hand.
-J (1) Industry is carried on by means of invest-
ment, which is made with a. view to pecuniary
gain (the earnings). The business man's endeav-
ors in managing the affairs of the concern in which
investment has been made look to the same end.
The gains are kept account of as a percentage on
the investment, and both they and the industrial
plant or process through the management of which
they are procured are counted in terms of money,
and, indeed, in no other terms. The plant or
process (or the investment, whatever form it takes)
13 capitalized on the baj*isof the gains which accrue

from it, and this capitalization proceedson the ground
afforded hy the current rate of interest, weighted
by consideration of any pro8pecti\'e change in the
eaming-capacity of the concern. The management
of the concern is effected by a more or less intri-
cate and multifarious sequence of bargains. The
decisive consideration at every point in this traffic
of investment and administration is the considera-
tion of price in one relation or another.
sj (2) The industry to which the business men in
this way resort as the ways and means of gain is
of tlie nature of a mechanical process, or it is
some employment (as commerce or banking) that
is closely bound up with the mechanical industriee.
Broadly, it is such industry as lies under the
dominion of the machine, in that it is involved in
that comprehensive quasi-mechanical process of
modem industrial life that has been discussed in an
earlier chapter. This implication of each industry
m a comprehensive system, or this articulation with
other branches of industry, is of such a nature
as to place each industrial concern in dependence
on one or more other branches of industry, from
which it draws its materials, appliances, etc., and
to which it disposes of itrS output ; and these rela-
tions of dependeuce and articulation form an end-
less sequence. That is to say, the interindustrial
rito which any branch of industry neces-
is do not run to a final term in :niv

188 THE THEORY OF BUSIKESS ENTEKPRISE

direction ; within the process of industry at large
there is no member that stands in the relation of
an initial term to any sequence of processes. The
ramification of industrial dependence is without
limits. The method of these relations of one con-
cern to another, or of one branch of industry to
another, is that of bargaiumg, contracts of p\ir-
chase and sale. It is a pecuniary relation, in the
last resort a price relation, and the balance of this
system of interstitial relations is a price balance.
' (3) These interstitial pecuniary relations, be-
tween the several concerns or branches of industry
that make up tlie comprehensive industrial system
at large, involve credit relations of greater or less
duration. The bargaining, by means of which in-
dustry is managed and the interstitial relations
adjusted, takes the form of contracts for future
performance. All industrial concerns of appre-
ciable size are constantly involved in such con-
tracts, which are, on an average, of considerable
magnitude and duration, and commonly extend
in several directions. These contracts may be of
the nature of loans, advances, outstanding ac-
counts, engagements for future delivery or futiure
acceptance, but in the nature of the case they
involve credit obligations. Credit, whether under
that name or under the name of orders, contracts,
accounts, and the like, is inseparable from the
management of modern industry in all that con-

THE THEORiT OK MOUEHS WELFARE

3 the working relations between businesses that
are not under one ownership, or between which
the relations resting on separate ownership have
not been placed in abeyance by some Buch expe-
dient as lease, pool, syndicate, trust agreement, and
tlie like. Credit relations of one kind and another
are also found expedient and profitable at many
points where their employment is not precisely
unavoidable. These extended credit relations are
requisite to the most expeditious and profitable
conduct of business, and so to the highest degree
of success of the business. Under the regime of
the machine industry and modern business methods
it is probably fair to say that the use of credit,
apart from loan capital and leases, unavoidably
goes to the extent required to cover all goods in
process of elaboration, from the raw material
to the finished goods, in so far as the goods change
hands (in point of ownership) dm-iug the process,

(4) The conduct of industry by competing busi-
ness concerns involves an extensive use of loan
credit, as spoken of in Chapter V. above. ^

The four conditions recited are characteristic)
features of that recent past during which brisk
times, crises, and depressions followed one another (
with some regularity as incidents of the normal
course of business.' Certain qualifications of this

1 Tbe "cycle" oF exaltation, crisis, and depreBsiou hcis frequently
been described. Perhapa as effective a descriptign and analygia aa
auy is that gl Tugau-Bai'auowaky, BaMeUkriieH, cbap. VUL

100 THE TKEOHV OF BUSINESS ENTERPBISE

characterization are necessary to fit the Immediate
present. These will be indicated presently.

V In brisk times the use of credit is large ; it may
be as a cause or an effect of the acceleration of
buaineas; most commonly it seems to be both a
cause and an effect. No appreciable business
acceleration takes place without an extension of
credit, at least in the form of contracts of purchase
and sale for future performance, if not also in the
form of loans. In times of protracted depreaaion
the use of credit seems on the whole to be some-
what restricted, at least such is the current appre-
hension of the case among business men. Still, it
cannot confidently be said that seasons of pro-
tracted depression are due solely to an absence of
credit relations or to an unwillingness to enter into
credit relations. A comparison of tlte course of
interest rates, e.g., does not warrant the generalizar
tion that the readiness with which loans caa be
negotiated need be appreciably different in brisk
and in dull times.' The readiness with which con-
tracts of purehase and sale are negotiated is appre-

■, ciably greater in brisk times than in times of
depression; that, indeed, is the obvious difference
between the two.

Of the three phases of business activity, depres-
sion, exaltation, and crisis, the last named has

Cf., however, Cuael, "Cm Kriser o
lldMkrifl. »ol. VI. No. 2, pp. 6©-7B.

I DAliga Tlder," Ekonomiilt

THE THEORY OF MODEUN WKLFARK l!)l

mod the larger and livelier attention from
indents, aa it is also the more picturesque phenom-
enon. An industrial erisis is a period of liquidar
tion, cancelment of credits, high discount rates,
ling prices and " forced sales," and shrinkage of
.lies. It has as a seiiuel, both severe and lasting,
shrinkage of capitalization throughout the field
affected by it. It leaves the business men col-
lectively poorer, in terms of money value ; but the
property which they hold between them may not
be appreciably smaller in point of physical magni-
ie or of mechanical efficiency than it was before
liquidation set in. It commonly also involves
appreciable curtailment of industry, more severe
lasting; hut the effects whicli a crisis has in
.ustry proper are commonly not commensurate
ita consequences in business or with the
iportance attached to a crisis by the business
community. It does not commonly involve an
appreciable destruction of property or a large waste
the material articles of wealth. It leaves the
.munity at large poorer in point of market
iues, but not necessarily in terms of the material
,n8 of life. The shrinkage incident to a crisisi
chiefly a pecuniary, not a material, shrinkage | it
:es place primarily in the intangible items of
■th, secondarily in the price rating of the tangi-
itema. Apart from such rerating of wealth, the
t substantial immediate effect of a crisis is an

192 THE THEORY OF BUSINESS ENTERPRISE

fextensive redistribution of the ownership of the
(industrial equipment, as noted in speaking of the
mse of credit.

The play of business exigencies which lead to
Buch a period of liquidation seems to run somewhat
as follows : Many firms have large bills payable
falling due at near dates, at the same time that
they hold bills receivable also in large amounts.
To meet the demand of their creditors they call
upon their debtors, who may in their turn have
bills receivable or niay hold loans on collateral.
The initial move in the sequence of liquidation
may be the calling in of a call loan, or a call for
additional collateral on a call loan. At some
point, earlier or later, in the sequence of liabilities
the demand falls upon the holder of a loan on
collateral which is, in the apprehension of his
creditor, insufficient to secure ready liquidation,
either by a shifting of the loan or by a sale of the
collateral. The collateral is commonly a block of
securities representing capitalized wealth, and the
apprehension of the creditor may be formulated as
a doubt of the conservative character of the
effective capitalization on which it rests. In other
words, there is an apprehension that the property
represented by the collateral is overcapitalized, as
tested by the current quotations, or by the appre-
hended future quotations, of the securities in
question. The market capitalization of the col-

THE THEORY OF MODERN WELFARE VXi

lateral has taken place on the basis of high prices
ud brisk trade which prevail in Buch a period of
ness exaltation as always precedes an acute
When such a call comes upon a given '
Edebtor, the call is passed along to the debtors
■farther along in the sequence of liabilities, and the
sequence of liquidations thereby gets under way,
with the effect, notorious through unbroken expe-
rience, that the collateral all along the line declines
in the market. The crisis is thereby in action,
and the further consequences follow as a well-
known matter of course. All this is familiar
matter, known to busmesa men and students by

IiOommon notoriety.
L The immediate occasion of such a crisis, then,
is that there arises a practical discrepancy between
the earher effective capitalization on which the
collateral has been accepted by the creditors, and
the subsequent effective capitalization of the same
collateral shown by quotations and sales of the
jcurities on the market. But since the earlier
iftpitalization commonly, in the normal case,
I out of a period of business prosperity, tlie
oint of inquiry is as to the ground and method
[ this effective capitalization of collateral during
the period of prosperity that goes before a crisis,
and this, in turn, involves the question of the
nature and causes of a period of prosperity.
^L The manner in which the capitalization of col-

194 THE THEORY OF BUSINESS ENTERPRISE

lateral, and thereby the discrepancy l>etween tliu
putative and actual eaming-capacity of capital, is
increased by loan credit during an era of prosperity
has been indicated in some detail in Chapter V,
above. But it may serve to enforce the view there
taken, if it can be shown on similar lines that a
period of prosperity will bring on a like discrepancy
between putative and actual earaing-eapacity, and
therefore between putative and eventual capitali-
zation of collateral, even independently of the
expansion effected by loan credit, ^

I A period of prosperity is no more a matter of
course than a crisis. It has its beginning in some
specific combination of circumstances. It takes its
rise from some traceable favorable disturbance of
the course of business. In such a period the
potent fact which serves as incentive to the accel-
eration of business is a rise of prices. This rise of
prices presently becomes general as prosperity
progresses and becomes an habitual fact, b-jt itj
takes its start from some specific initial disturbanca
of prices. That is to say, prices rise first in some
one industry or line of industries.^

. ' Ab, e.g., the era of prosperity 180T-1DO2 t«ok iU aiart from Ibe
,' deniajid for supplies caused b; the Spanish- American War, though
', other favorable circuniHtances acted to give it volume. Mr. Carver,
poABlbly following suggestione given by SpietlioS's discussion, lias
auggested that the lines of buEinesa in wlUcU the favorable initial dis-
turbance ariaea are neceaaarily those engaged in the production o(
"producer's goods" ; the reason for this being that, in the nature of
the case, '> the value of producer')* goods tends to Suctuate more vio

IL THE THEOKY Oi' M.ODERN WELFARE
FBy new investmeDts, as well as by extending the
perations of the plants already employed, busi-
ness men forthwith endeavor to take advantage of
such a rise. The endeavor to market an increaaed
supply of the things for which there is an en-
larged demand, brings on an increased demand
and an advance of prices in those lines of indus-
try from which the conceros tliat had the initial
advantage draw their supplies. In part by actual
increase of demand and in part through a hvely
anticipation of an advanced demand, aggressive
business euterprise extends its ventures and pushes
up prices in remoter lines of industry. This trans-
mission of the favorable disturbance of business
{substantially a psychological phenomenon) follows
very promptly under modern conditions, so that
any differential advantage that accnies at the out-
set to the particular line of industry upon whicli
the initial disturbance falls is presently lost or
greatly lessened. In the meantime extensive
contracts for future performance are entered into
in all directions, and this extensive implication of

lently than the value oE consumer's goods," iuasmuch as the valae ot
producer'8 goods varies iMinewliat sd the iDognitude of the uuirgiu of
proBta, white that of the cnnBumer's gixids varies sonieirhal aa Uie
uugDitude of the entire demand on which this margin of protiU rcsla
M an Incremeut. (Tlie value of iiroduoet's goods =/ (A), that of con-
turner's goodH=/ (demand -H A),) From tlie iilce line of argutneut
itihoold follow Cliat the iDitial break in time of crisis must come in
some line of business occupied with producer's goods. Cf. Quarterly
Journal ofEconomici, May 1903, pp. 4(IT-60U. S«e also foot-note ou
p. ISl Btuve.

196 THE THEOEY OF BUSINESS ENTERPRISE

the various lines of industry serves, of itself, to
maintain the prosperity for the time being. If
tlie original favorable disturbance of demand and
prices, to which the prosperity owes its rise, falls
off to the earlier level of demand, the era of pros-
perity has thereby a term set to its run ^salthough
the date of its termination is always at some dis-
tance in the future, beyond the time when the
original demand has ceased to act. JThe reason
for this retardation, whereby the close of an era
of prosperity is always delayed, other things equal,
beyond the lapse of the cause from which it has
^arisen, is (l)Uhe habit of buoyancy, or speculative
I recklessness, which grows up in any business com-
I munity under such circumstances, (2) the con-
I tinued life of a considerable body of contracts for
future performance, which acts to keep up the
: demand for such things as are required in order
to fill these contracta and thereby keeps up prices
in 30 far. Iii_gfiii£Eal it may be said that after
the failure of tlie favorable price disturbance to
which it is due, an era of prosperity will continue
for that (indefinite) further period during which
the fringe of outstanding contracta continues to
dominate the business situation^ Some further,
new contracts will always continue to be made
during this period, and some unfilled contracts
will always be left standing over when the liqui-
dation sets in ; but, broadly speaking, the wind-up

THE THEORr OF MODEHN WELFABE

comes, not when this body o£ outstanding contracts
have run out or been filled, but when the business
of filling them and of filling the orders to which
they give rise no longer occupies the attention of
the business community in greater measure than
the rest of current businessi

The run of business exigencies on which an era
of prosperity goes forward may be sketched in its
general features somewhat aa follows : Increased
demand and enhanced prices, with the large con-
tracts which follow from such a state of the
market, increase the prospective earnings of the
several concerns engaged. These prospective earn-
ings may eventually be realized in full measure,
or they may turn out to have been putative earn-
ings only; that is largely a question of how far
in the future the liquidation lies. The business
efiEect of increased prospective earnings, however,
is much the same whether the event proves the
expectation of increased earnings to have been
well grounded or not. The expectation in either
case leads the business men to bid high for equip-
ment and supplies. Thereby the effective (mar-
ket) capitalization is increased to answer to the
increased prospective earnings. This recapitali-
zation of industrial property, on the basis of
heightened expectation, increases the value of this
property as collateral. The inflated property be-
comes, in effect, collateral even without a formal

198 THE THEORY OF BUSINESS ENTERPRISE

extension of credit in the way of loans ; because,
in effect, the contracts entered into are a credit
extension, and because the property of the con-
tracting parties is liable to be dra^vn into liquidar
tion in case of non-fulfilment of the contracts.
But diu'ing the free awing of that buoyant enter-
prise that characterizes an era of prosperity con-
tracts are entered into with a somewhat easy
scrutiny of the property values available to secure
a contract. So that as regards this point not only
is the capitalization of the industrial property in-
flated on the basis of expectation, but in the mak-
ing of contracts the margin of security is less
closely looked after than it is in the making of
loans on collateral. There results a discrepancy
between the effective capitalization during pros-
perity and the capitalization as it stood before
the prosperity set in, and the heightened capitali-
zation becomes the basis of an extensive ramifi-
cation of credit in the way of contracts (orders) ;
at the same time the volume of loan credit, in
set form, is also greatly increased during an era
of prosperity.'

An era of prosperity is an era of rising prices.
When prices cease to rise prosperity is on the wane,
although it may not promptly terminate at that
juncture. This follows from the fact that ihe

' Cf. Sombart, Kaiiilaligviris, vol. II. ch. I., on the motive forOM
at nork in advancing buaiiitsH i>ul«rprise.

THE THEORY OF SIODEKN WELFASE 189

^Hlntative increase of earnings on which prospeiity,
^^Wts is in substance au apprehended differential |
gain in increased selling price of the output overj
the expenses of production of the output. Only
^Lbo long as the selling price of the output realizes
Bnuch a differential gain over the expenses of pro-
duction, ia the putative increased rate of earnings
realized ; and so soon as snch a differential advan-
tage ceases, the era of prosperity enters on ita clos-
; [diase.

Such a differential advantage arises mainly from \

Eiwo causes: (1) The lines of industry which are

mote, industrially speaking, from the point of

initial disturbance, — from which, that is to say,

the lines of industry first and chiefly affected by the

rise draw suppUes of one kind or another, — these

^bemote lines of industry are less promptly and less

^Pbeutely affected by the favorable disturbance of the

price level ; this retardation of the distiu-bance

affords the uidustries nearer the seat of disturbance a

differential advantage, which grows less the farther

FemoTed the given enterprise is from the point of

ttitial disturbance.' (2) The chief and most secure

fferential advantage in the case ia that due to

1 The " infU&I disturbance " here spoken of niAy of course be of a
progressive or recurring character, and so may keep the dlRerential
■drantage going in a progressive manner ; aa, r.g.. In iliecaseof a pro-
grcBalve demand for supplies due to a protracted war or to n period o(

Uinned preparaUon for war, such ax lias occurred in Ainerlpii during

|i Iwt tew jeara.

200 THE THEORY OF BUSINESS ENTERPRISE

the relatively slow advance in the cost of labor
, during an era of prosperity. Wages ordinarily are
J not advanced at all for a considerable period after
such an era of prosperity has set in ; and so long
aa the eventual advance of wages does not overtake
the advance in prices (which in the common run of
cases it never does in full measure), so long, of
course, a differential gain in the selling price ac-
crues, other things equal, to virtually all business
enterprises engaged in the industries affected by
the prosperity.

There are, further, certain (outlying) lines of
industry, as, e.gr., farming, which may not be drawn
into the movement in any appreciable degree,and the
price of supplies drawn from these outlying indus-
tries need not rise ; particularly they need not
advance in a degree proportionate to the advance
in the prices of the goods into which they enter as
an element of their expenses of production. To an
uncertain but commonly appreciable extent there
is also a progressive cheapening of the processes
of production during such an era, and this cheap-
ening, particularly in so far as it affects the pro-
duction of the goods contracted for, as contracted
with the appliances of production, serves also to
maintain the differential advantage between the
contracted sale price and the expenses of produc-
tion of the goods contracted for.

In the ordinary coin-se, however, the necessary

THE THEORY OF MODEHN WELFAEE

expeiiBes of production presently overtake or nearly
overtake the prospective selling price of the out-
put. The differential advantage, on which business
prosperity rests, then fails ; the rate of earnings
. falls off ; the enhanced capitalization based on en-
1 hanced putative earnings proves greater than the
earnings realized or in prospect on the basis of an
enhanced scale of expenses of production; the col-
lateral consequently shrinks to a point where it
will not support the credit extension resting on it
in the way of outstanding contracts and loans ; and
liquidation ensues, after the manner frequently set
forth by those who have written on these subjects."
At some point in the system of investment and
business extension wUl be found some branches of
induBtry which have gradually lost what differen-

»i 1 Then te a point or two of further detail in what may be called the
VBtbod of prosperity and crlila, nhicb are best dlscaased in connec-
llOD with the phenomena of depression. These wQl, therefore, be
taken ap preseDtl]'. The above characterization of an era of prosper-
ity and tbe manner of its eihausting itself will serve fks a description
of tbe coime which sach an era takes under the regime of the more
highly developed busiuegg methods of the high tide of the nineteenth
centtiTy. For the earlier, leaa fully developed, busineaa aitualion of
the early ninel«enth century the corresponding cour*
somewhat different, owing, chiefly at least, (1) to a slower rate of trans-
mission of any price disturbance, and -(2) to the greater range and
ralue of "oatlying" industries which are very tardily if at all drawn
Into tbe exuberant movement of prosperity. In this connection it is
worth noting that during this earlier period of the ninteenth century
the production of specifically productive goods had not been carried
to the point afterward attained, either in the dlflerentiation and
■pecialiution of industries oocupied with this class of goods or in tbe
relative volnme of this class of industriM.

202 THK THEORY OF BUSINESS ENTEEPRI8E

tial advantage they started out with when they
entered on the era of prosperity; and if these
are involved in large contracts and undertakings
which are carried over into the phase of the
movement at which this particular branch of in-
dustry has ceased to have a differential advantage
in the price of its output over the cost of its sup-
plies of material or labor, then what may have
been a conservative capitalization of their hold-
inga at an early phase, while their earning-ca-
pacity rested on a large differential advantage,
will become an excessive capitalization after their
eaming-capacity has declined through loss of their
differential advantage. Some branch or branches
and some firms or class of firms necessarily fall
into this position in the course of a period of
phenomenally brisk times. A business concern so
placed necessarily becomes a debtor, and its liabili-
ties necessarily become, in some degree, bad debts.
It is forced by circumstances to deliver its output
at prices which preclude ita obtaining such a
margin as its extension of business presupposed.
That is to say, its capitalization becomes exces-
sive through shrinkage of its eaming-capacity
(as counted in terms of price). A concern of this
class which is a debtor is precluded from meeting
its obligations out of its current earnings ; and if,
as commonly happens in an appreciable proportion
of cases, it^ obligations have already been aug-

THE THEORY OF MODERN WELFARE

mented to the extent which its recent earning-
capacity would warrant, then the concern is in-
Bolvent for the time being. If the claims against
it are pressed, it has no recourse hut liquidation
through forced sales or bankruptcy. Either ex-
pedient, if the case is one of considerable magni-
tude, is disastrous to the balanced sequence of
credit relations in wliich the business community
is involved. The system of credit relations pre-
vailing at such a time has grown up on the basis
of an eaming-capacity transiently enhanced by a
wave of differential price advantage; and when
this wave has passed, even if it leaves prices
higher all around, the differential advantage of
at least most concerns is past. The differentiaN
price advantage has come to the several branches
or firms in succession, and has, in the typical case,
fluccessively left each with an excessive capitaliza-
tion, and has left many with a body of liabilities
out of proportion to their subsequent earning-
eapacity. This situation may, evidently, come
about in this manner, even without lowering the
a^regate (pecuniary) eaming-capacity of the busi-
community to the level at which it stood
e the wave of prosperity set in.'

1 The sever&l pbaaea of this sequence of eialUttion and depieuion,
^for Any giveD business concern, ma; be stated as foUoivB : —

ea = earnings ; pr = sale price of output ; eip = expenaeB of

ion of onlpot ; mar = mai^n iif gain on output = pr — exp ;

= taHial efleciiTG c&pitallxutloii ; yp = yfar'a purchase at (current

204 THE THEORY OF UUSINES8 ENTEKl^ISE

/ But when such a situation has come, all that is
required to bring on the general catastrophe is
that some considerable creditor find out that the
present eaming-capacity of his debtor will prob-
ably not warrant the capitalization on which his
collateral is appraised. In self-defence he must
decline the extension of a loan, and forced liquidar
tiou must follow. Such a liquidation involves

ntm = int) = | — , disreganliag ruk ; cr = noniiiil credit extanBion on

given cap =

"my

Then ftt the initial phsae,

= (mar = pr — exp)oatp,

At the eabseqnent phase, of exallation.

= [(pr'= pr + Apr) - eip] mVp
= (mar + Amar}outp>ea,
, ea' ea + Aea

cap' cap + Acap

All the concluding phase, of depression,

= mar" x outp

= eip + 4e3tp)]ontp<«i» ^

--??-<cap',

ij_cap"_cap'- Acap"

For ^implicit]' of statement, in all thii no account Is t^en of the
element of risk, nor of the fluctantions of diacount rates or the variations
of volume of oatpat. If these t>e included in the calculation aa van-
itblea, thu result is inuDh the aaiiie. They are funclioiis of Ibe variables
ttlrewly included, and thciv inclusion would, on the whole, accentual^
the uHcillatiuiis ahomi by the oouiputation ait it standa.

I mil
1

THE TilEORY OF ilODKKN W F.LKAKE

tting under the ruling prices of products, which
lessens the profits of competing firms and throws
them into the class of insolvents, and so extends
the readjustment of capitalization.

The point of departure for the ensuing sequence
of liquidation is not infrequently the failure of
some banking house, but when this is the case it
is pretty sure to be a bank whose funds have been
"tied up" in '* unwise" loans to industrial enter-
prises of the class spoken of above.'

The abruptness of the recapitalization and of the
redistribution of ownership iuvolved in a period of
liquidation may be greatly mitigated, and the
incidence of the shrinkage of values may be more
equably distributed, by a judicious leniency on the
part of the creditors or by a well-advised and dis-
creetly weighted extension of credit by the govern-
ment to certain sections of the business community.
Such measures of alleviation were had, with happy
effect, in the case of a recent stringency which is
sometimes spoken of as an averted crisis. But
where the situation answers the specifications

I A crUis may take iis rise from credit exUnaion Iji other th&n
properly Industrial business. Sucli, e.g., was in great measure tbe
American crisie in 1837, when the moat obrioiis and diaastrons inQii-
tloD was in apecuiative iand values and the credits based on them.
Bnt It la no stretch of the concept to eay that in that case the situation
oat el which the criaiB arose was an overcapitalization ol the loud
nloea In question. Capitalized land la, of course, " capital " for buai-
neu purpcses aa truly bb any otlker body of values that are capitalized
•ltd dntwn into the money market.

206 THE THEOKY OF BUSINESS KNTEEtrKISE

recited above, in reapect of a large and widely
prevalent discrepancy between earning-capacity
and capitalization, a drastic readjuatment of values
is apparently unavoidable.

The point has already been adverted to once or
twice that the piost substantial immediate outcome
of such a liquidation as is involved in a crisis is a
redistribution of the ownership of the property
concerned in the liquidation, whereby creditors and
similar claimants gain at the expense of the sol-
vent debtors/ Such being the case, it would logi-
cally follow that the large creditors should see and
follow up their advantage by concertedly pushing
the body of debtors to an abrupt liquidation, and so
realizing as large a gain as possible with the least
practicable delay, whenever the situation offers.

Such may be the logic of the circumstances, but
such ia not the course practically taken by the
large creditors under the circumstances. For this
there is more than one reason. It is not, appar-
ently, that human kindness o^'errales the creditors'
impulse to gain at the expense of the debtors. The
ever recurring object-lessons afforded by operations
in the stock and money market enforce the belief
that when one business man gets the advantage of
another he will commonly use the advantage with-
out humanitarian reserve, if only the advantage ia
offered him in terms which he can comprehend.
jBiit short-sightedness and lack of insight beyond

THE THEORY OK MODERN WELFARE 207

tilt; conventional routine seem to be fairly univer-
sal traits of the claaa of men who engage in the
larger business activities. So that, while it would
be to the unequivocal advantage of the large cred-
itor, in point of material gain, to draw in his
debtor's property at such a reduced valuation as
comes in a period of abrupt liquidation, yet he does
not ordinarily see the matter in that light ; because
the liquidation involves a shrinkage of the money
value of the property concerned, and the business
man, creditor or debtor, is not in the habit of
looking beyond the money rating of the property
in question or beyond the most immediate futun
The conventional base line of business traffic,
course, is the money value, and a recognition of
the patent fact that this base line wavers incon-
tinently, and that it may on occasion shift very
abruptly, apparently exceeds the business man's
practical powers of comprehensioa Money value
is his habitual bench-mark, and he holds to the
conviction that this bench-mark is stable, in spite
of Uie facts.'

* It la, In great part, through or b; force of SuctuAtions of thia baaa
line of moDey valaes that targe accumulationa of wealth are mads.
One might almost ray that this la tbe "normal" method by which
aavinga v« made and capitalized in later modern times. Fluctuatiomiu
the noch market, of course, are of this character, as are commonl; also
Urge Tariations of tbe course of prices outside the slock market, as well
aa QuctiiAtiona of the moaey market. The great gaina of succeasful
promotera of corporatioDS and the like come in this manneT usually.
The; are due to eulargement of tbe money value of a given block of
tudustrial equipment independeotly of any change in the pbysical

ii08 THE THEORY OF BUSIKESS ENTERPRISE

It is true, cases occur, from time to time, of
transactions of some appreciable magnitude in
which some degree of recognition of this fact is
met with. Some large business man may yet rise
to the requisite level of intelligence, and may com-
prehend and unreservedly act upon the fact that
the money base line of business traffic at lai^ is
thoroughly unstable and may readily be manipu-
lated, and it wUl be worth going out of one's way
to see the phenomenal gains and the picturesque
accompaniments of such a man's work. Paren-
thetically it may be remarked that if such a degree
of insight should become the common property of
the business community, business traffic as now
carried on might conceivably collapse through loss
of ita base line. What is yet lacking in order to
such a consummation is perhaps nothing more
serious than that business capital be reduced to a
somewhat more thorough state of intangibility
than it has yet attained, and that does not seem a
remote contingency.'

cbiirecter of the equipment. Which comes near saying tbat Uie \txge
foitunea ori^nate In sacb changeu of Uie base line, — from whleli it
follows Ihat the larger accretions to the volume of capital are of this
origin. The la^e profits are made in the form of capital, which ia
acquired by Tlrtue of a price variation. See fool^note, pp. 168-170.

< A sutntantial move in this direction would be that advocated by
Mr. F. S. Stetson before the New York Bar Association, and reiterated
before the United Stales Industrial Commission : " To permit the tot-
matfoQ of a dlatinot claas of bi^lneKS stock corporations whose capital
■lock maj be issued as represeniiug proportional parts of the whole
oapital without any nomlua! or money value." The market valae of

I
I

THE THEORY OF WODEEN WELFARE 209

There is, however, another. and more constrain-
ing circumstance which hinders the large creditors
from wilfully pushing the debtors to a reckoning
when things are ripe for liquidation. As was
indicated aboVe, the sequence of credit relations in
an era of prosperity is endlessly ramified through
the business community ; whereby it happens that
very few creditors are not also debtors, or stand in
such relation to debtors as would involve them in
Bome loss, even if this loss should not be commen-
surate with their eventual gain at the cost of
other debtors. ) This circumstance by itself has
a strong deterrent effect, and when taken in
connection with what was said above of the
habitual inability of the men in business to ap-
preciate the instability of money values, it is
probably sufficient to explain the apparently short-
I sighted conduct of those large creditors to seek to
mitigate the severity of liquidation when the liqui-
dation has come due. |

The account here offered of the " method " of
[ crises and eras of prosperity does not differ greatly
I from accounts usually met with, except in explain-
ing these phenomena as primarily phenomena of
business rather than of industry. The disturbances
of the mechanical processes of industry, which are

■ucb sbaree woald be the only value assigned them, and little ot a bnae
Hub la the way of a legally imputed value would remain. The dt jure
Talne would do longer binder s Eree reco^ition ol the facta. — Rrpurl
Of Ok tndMtrial OotnmUtion, vol. I. p. 070.

210 TUK THEORY OF BUSINESS ENTERPRISE

a conspicuous feature of any period of crisis, follow
from the disturbance set up in the pecuniary traffic
instead of leading up to the latter. While industry
and business stand in a relation of mutual cause
and effect, in this as in other cases J the initiative
in such a movement belongs with the business
traffic rather than with the industrial processes/

Industry is controlled by business exigencies and
is carried on for business ends. The effects of a
wide disturbance in business, therefore, reach the
industrial processes pretty directly, and the conse-
quences, in the way of an expansion or curtail-
ment of industrial activity and an enlarged or
shortened output of product, are, of course, both
immediate and important. /As a primary effect, on
the industrial side, of an era of prosperity, the com-
munity gains greatly in aggregate material wealtji.
The gain in material wealth, of course, is not equa-
bly distributed ; most of it goes to the larger busi-
ness men, eventually in great part to those who
come out of the subsequent liquidation on the credit
Bide. To some extent this aggregate material gain
is offset by the unavoidable waste incident to the
stagnation that attends upon an era of prosperity-
It is further offset by the fact that good times
carry with them an exceptionally wasteful expen-
diture in current consumption. Also, the usual
and more effectual Impetus to an era of prosperity,
when it is not an inflation of the currency, is some

I
I

THE THKOHY OF MODERN WELFARE

form of wasteful expenditure, as, e.(/., a sustained
war demand or the demand due to the increase of
armaments, naval and military, or again, such an
interference with the course of business as is
wrought by a differentially protective tariff. The
later history of America and Germany illustrates
both these methods of procuring an era of pros-
perity. These methods, it wUl be noticed, are, in
their primary incidence, of the nature of a waste of
industrial output or energy; but the prosperity
achieved is, none the less, to be recognized as a
beneficial outcome in point of heightened industrial
activity as well as in point of increased comfort
for the industrial classes.

To the workmen engaged in industry, particu-
larly, substantial benefits accrue from an era of pros-
perity. These benefits come, not in theway of larger
returns for a given amount of work, but more work,
fuller employment, at about the earlier rate of pay.
To the workmen it often means a very substantial
gain if they can get a fuller livelihood by working
harder or longer, and an era of prosperity gives them
a, chance of this kind . Gradually, however, as pros-
perity — that is to say, the advancing price level —
rises and spreads, the increased cost of living
neutralizes the gain due to fuller employment, and
after the era of prosperity has been under way for
some time the gain in the amount of work obtain-
able is likely to be fairly offset by the increased

212 THE THEORY OF BUSINESS ENTERPRISE

of the bUB^^
perity is dua
tardily thanl

cost of living, Aa noted above, much ol
ness advantage gained in an era of prosperity
to the fact that wages advance more tardily
the prices of goods. An era of prosperity does not
commonly bring an increase of wages until the era
is about to close. The advance of wages in such a
case ia not only a syniptom indicating that the
season of prosperity is passing, but it is a business
factor which must by its own proper effect close
the.season of prosperity as soon as the advance'
in wages becomes somewhat general. Increasing ',
wages cut away the securest ground of that differ- ',
ential price advantage on which an era of prosperltW i
runs.

Periods of crisis or of prosperity are, after all,
relatively simple phenomena with strongly marked
features, and a passable explanation of them is
correspondingly easy. They have also the advan-
tage of having received much attention at the hands
of the students of economic history. On the other
hand, protracted depression, not traceable to wide-
spread hardship or calamity arising from circum-
stances outside the range of business transactions,
is a relatively new and untried subject for economic
theory. Newer, more obscure, witL less pronounced
features and less definite limits than movements of
speculative advance or speculative crises, this phe-
nomenon has to a less extent engaged the steady

THE THEORY OF MODERN WELFARE 213

Attention o£ students. An inquiry into the life
history and the causes and effects of depression,
from the point of view of a theory of business, may
therefore scarcely be expected to yield concise or
secure conclusions.

fSince industry waits upon business, it is a matter
of course that industrial depression is primarily a
depression in business. It is in business that de-
pression is felt, since it is on the business side of
economic activity that the seat of economic sensi-
bility may be said to He ; it is also in business (pe-
cuniary) terms that the depression is measured
whenever a measure or estimate of the matter is
attempted. In so far as there is an attendant
derangement of the mechanical processes and of the
mechanical articulation of processes in industry, the
derangement follows from the pecuniary exigencies
of business. Depression and industrial stagnation
follow only in case the pecuniary exigencies of the
situation are of such a character as to affect the
traffic of the business community in an inhibitory
way. \But business is the quest of profits, and an
inhibition of this quest must touch the seat of its
vital motives. Industrial depression means that
the business men engaged do not see their way to
derive a satisfactory gain from letting the industrial
jtrocess go forward on the lines and in the volume for
-which the material equipment of industry is de-
signed. It is not worth their while, and it might

214 THE THEOEY OF BUSINESS ENTERPRISE

even work them pecimiary harm. Commonly their
apprelienaion of the discrepancy which forbids an
aggressive pursuit of industrial business is expressed
by the phrase " overproduction." An alternative
phrase, intended to cover the same concept, but less
frequently employed, is " underconsumption." *

The controversial question as to the tenability
of any given " overproduction " doctrine may, for
the present piu-pose, be left on one side ; it lies out-
side the theory of business and it has no merits or
demerits for the purposes of a theory of business.
The point of interest here is rather the ground of
its acceptation among business men and the meaning
which this notion has for them ; that is to say, it is
chiefly of interest here to inquire into the habits of
thought which give cogency and effect to the
dogma of " overproduction " as practically held by
the body of business men, — what it practically
means, why the dogma is held, and what is its
efiect on the course of busmess enterprise.

" Overproduction," or " underconsumption," as
it is met with in the views of business men, is
neither a vacant dogma nor a shifty apology where-
with to cover their own delinquencies, but a very
concretely real state of affairs. It is a state of
affairs that prevails when business is persistently

lOf.Hobeon, Probletit of tht Unen^oyed.ch.V.; Yiftlles, £a con-
tommation et Its crUts teonomique», eapocisllr " Introduction " and
ch. 111.

THE THEORY OF MODERN WELFARE 21-3

dull ; and the concept covered by the term com-
prises the sufficient cause of the dulness, in the
apprehenaion of the business community, even
though they may not always speak of the difficulty
by that name, (t may be worth while, even
at the risk of tedium, to point out that this concept
of "overproduction" applies, not to the material,
mechanical bearing of the situation, but to its pe-
cuniary bearing./ The notion is never seriously
entertained that there is or may be an embarraesing
excess of goods, or of the appliances for their pro-
duction, above what would be of some human use
if the business situation permitted them to be
tiimed to use.

(1) The supply of consumable goods is, practi-
cally, never greater than the community's capacity
for consuming them. An embarrassing excess in
any line is practically a remote contingency at the
most.' There are many eloquent passages in the
economic manuals which may be called in witness
of this truism, where much pains is taken to show
that human wants are, in the nature of the case,
indefinitely extensible. Nothing stands in the
way, we are told, but "difficulty of attainment"
of the goods with which to satisfy these wants.
(2) In times of depression, or " hard times," there

■ Sometbiog XiM. might bear such a conamictlon oooun, t.g^ lookUy,
when ■ run o( flsb ezcaeds the ability of the workmen to take
them. The tatnity of appealing to Bach an example Is plain.

I \^

216 THE THEORY OF BUSINESS ENTERPRISE

is, under the modem industrial system at least, no
overproduction in the sense of a production so
large as to overtax the working capacity of the
industrial appliances and processes employed, nor
so large, even, as to overtax the normal powers of
the force of workmen or require them to work
overtime and holidays. Quite the contrary. That
sort of thing liappens only in brisk times, when
there ia no overproduction. Seriously to recite
such platitudes as these may seem like a trifling
with the patience of the printer, or it may be taken
for a light-headed excess of " wissenschaftlicher
Methode"; but these two formulations appear to
cover all the conceivable ways in which overpro-
duction may occur, so long as the terra is construed
from the point of view of the mechanical facts of
the case. Seen from this side a period of depression
is a period of underproduction ; mills run on half
time or none, and the supply of goods that finds
its way into the hands of consumers is sensibly
scant for the demands of comfort.

The difficulty is, of course, a pecuniary one, and
the phrase is used by business men in that pecun-
iary sense in which it has an immediate bearing
on business. " Excessive competition " is an alter-
native phrase. ^ There is an excess of goods, or of
/the means of producing them, above what is espe-
client on pecuniary grounds, — above what there is
an effective demand for at prices that will repay

THE THEORY OF MODERN WELFARE 217

the cost of production of the goods and leave
Bomething appreciable over as a profit. It is a
question of prices and earnings. The difficulty is
that not enough of a product can be disposed of at
fair prices to warrant the running of the mills at
their full capacity, or running them at a rate near
enough to their capacity to yield a fair profit. Or,
to turn the proposition about, aa business men are
in the habit of doing, tliere is more of an output
offered than will be carried off at a fair price, — •
Buch a price as will afford fair or ordinary profits
on the investment and the running expenses.
There is too large a productive capacity; there are
too many competitive producers and too much
industrial apparatus to supply the market at rea-
sonable prices. The matter reduces itself to a
queation of fair prices and ordinary profit*/

If there is a large volume of outstanding credit
obhgations, that will complicate the situation.
There is always a considerable amount of interest-
bearing securities outstanding, and the claims of
these securities have to be satisfied before divi-
dends can be paid on stock, or before profits accrue
to industrial ventures which have issued the secu-
jitiea. These fixed charges, together with others
of a like kind, narrow the margin from which
profits are derived and increase the handicap
which a season of dull times brings to the business

I Cf. Smart, Studia in Kcanomlcf, ch. VTI.

218 THE THEORY OF BUSINESS ENTERPRISE

men in charge of industry. At the same time
fixed charges prechide shutting down, except at a
sure and considerable loss. The business men
involved are constrained to go on, and in the ab-
sence of wide combinations in industry they are
constrained to go on at such competitive prices as
to preclude reasonable profits.

The question of fair prices and reasonable
profits has some reference to current rates of in-
terest. / A " fair " rate of profits is such a rate as
bears a reasonable relation to the current rate of
interest, although this relation of profits to intei>
est rates does not appear to be a strict one. Still,
there undoubtedly is some reference to the current
rate of interest as a sort of zero line to whidi
profits should not decline. New investments are
made on the ba^is of current rates of interest
and with a view to securing the differential gain
promised by the excess of prospective profits over
interest rates.

In a period of depression the aggregate indus-
trial equipment is, notoriously, not running at ita
full capacity ; there are many idle and half-idle
plants and many idle workmen. The concerns in
question find themselves unable to do a full run of
business at reasonable profits. Still, unless the
depression is of exceptionally short duration, there
is {ilways some new investment going on. More
or less of new capital continues to find its way

^eU(

into industrial business in competition with the
concerns that are already in the field.' In case of
a protracted depression the aggregate of new in-
vestments so made may, in the course of years,
amount to a very considerable addition to the
industrial outfit, and the production of the new
establishments may very appreciably increase the
aggregate output. Indeed, the output of the new
establishments is a notable factor in swelling the
supply and keeping down prices. But the new
investments made during the depression are profit-
able, at least at the start. Or even if this should
be questioned when stated in this broad way, it
will at least hold true that they are commonly
entered upon with a well-advised expectation of
their being profitable if the situation does not ma-
terially change between the time when the new
venture was entered upon and the time when the
new equipment has got under way. If the interval
between the inception of the new enterprise and
its completion is a long one, the situation may so
change in the meantime as to leave it unprofitable
even if it has been conservatively planned. There
are also, of course, fraudulent enterprises which
are not expected by their promoters to pay a profit
the investment ; and there are probably, also,

1 For the present pnrpooe a coacem wblch puaes through » Itqui-
Ion uid rekppeara with a rerat«d and reai^aiiizcd capltatizaliou ami
bod]' ot tiAbllittaa alsu bAS uauch of tlie ch&racter of a new inveBtmenl.

220 THE THEORY OF BUSINESS ENTERPRISE

always some ventures entered upon during dull
times with a view to being beforehand in prepara-
tion for better times. But after all has been said
in qualification of the main proposition, it remains
true that some new investment is going on with a
well-adviaed expectation of reasonable profits on
the basis of current costs, prices, and rates of
interest.'

The rate of interest in times of depression may
be unsatisfactory to lenders; it may be discourag-
ing by comparison with the customary range of inter-
est rates during better times. Still, the obstacle to
business is not to be sought in an effectual dia-
couragement of lenders, for in point of fact money

' CF. L. Pohle, BevStkemngibevKgung, Kapilalbildung uitd perUh

dacke Wirtsthaftshrdett, who concludes that depres^on is due to »
Bcarcily of capital as compared with populatiou ; tbe rat« of Incresae
of capital is conceived to fall Bliortof tLerat«of increase of popnUUon,
heuce periodical depression.

Cf., on Uie olher hand, MacroHty, Triistt and the Stale, p. 133, who
finds, b; recourse to Uic tetitimony before the Royal Commissioa on
the Depreaaion of Trade and Industry, that there is at such times
capital constantly seeking investment and enlering into competition
with what, is already invested. Ct. Final Report nf the Bnyal Com-
masion on Depresirion of Trade and Industry (1886). "The replies
received from Chambers of Commerce to the inquiries we addressed to
tbem confirm tbe statempnti made by the nitnesses who appeainl
before us. Those replies lesiify to the general maintenance or increase
of the volume of trade, accompauled in many cases by a shrinkage in
its value, and in all cases by a fierioua dinilnuLbn of profiL They also
show how general la the belief in commercial circles that overproduc-
tion, tbe fall of prices, and more effective foreign competition assisted
by hiph tariffs, go far to account for the existing position ol trade
and industry lu thin country " (pp. ii-x). Cf, also pp. xi-xr of ihe

tTHE THEORY OF MODERN WELFARE 221
readily to be had on good security during any
protracted depression.' There ia also the fact that
investment is continually goiug on, which argues
that the difficulty is neither that capital cannot be
found for investment, nor that investment has no
prospect of reasonable profits. Practically, no ex-
^Libeptional amount of fluent funds is withheld from
^Blhe market, — except in time of panic, which is
another matter. It may be added that the rate of
interest need not be notably low in time of depres-

tflion, just as, on the other liand, a period of busi-
BBss exaltation is not uniformly accompanied by
a notably high rate of interest.

But a low or declining rate of interest is effective
in the way of depressing the business situation,
even though a depression may go on without it.
The line of its bearing upon business depression,
or at least one line, is as follows : Established
business concerns (particularly corporations) en-
gaged in industry have some appreciable fixed
(interest) charges to meet — on leases, mortgages,
and interest-bearing securities (preferred stock and
bonds). These outstanding obhgatious and securi-
ties may have been negotiated, " floated," at an
earlier period of higher interest rates and higher
ofits, or they may have been carried over tbrough
. period of liigher interest rates. In the former

Cf., t.g.. Burton, Crttea and Dtpreasions, ch. IV., especially pp.

222 THK THEORY OF BUSINESS EKTERVKISE

case these interest charges are excessively high aa
compared with the present capitalized value of the
property on which they rest, computing the cap-
italization on the basis of the present cost of
replacing this property and the present interest
charge which this cost of replacement would bear.
In the latter case the original capitalization of the
corresponding items of property will have under-
gone a practical (effective) recapitalization at a
lower figure to correspond with the higher rate of
interest prevalent during the interval in question;
and in the subsequent period of low interest, the
fixed charge on this recapitalization is excessively
high aa compared with the current effective cap-
italization of the property. The liabilities are
excessive, in respect of their interest charges, as
compared with the present earning-capacity of the
property represented by them.^

< More In detail, what bappena in connection with interest-bearing
securities carried over an interval of higb interest rates and business
activity may be formulated ob follows : When cnrrent interest rates
advance, securities bearing a fixed rate (of dividends or interest)
decline on the market. That Is to say, the effective capitalized value
of the claim to these fixed rates of income, as shown by the market
quotaUons, shrinks. At the same time, since the period during which
this readjustment occius is a period of acceleration In buainSK. the
eamlng-capacity C'"''"''! c putative) of the property on which tbese
securiLleB rest has increased over what it was al the time the seaoritiea
were floated. Hence this property (indujtirlal equipment) is also
recapitalized, in the market quotations, at a higher value than it had
when the securities were floated. The effective recapitalization carried
out by the market quotations nets, for the present purpose, to the same
effect apoD the value of both of the items conaidered, this effect bolog
to leave a margin of the property prevloudy covered by the McurltlM

^ npou

What gives effect to this drawback for the
_ buBiDesB enterprises which have such fixed interest

ivered &ad avklUble sa collAteraJ on nbicb to Rott a ni
«( credit, in the form of mortgage loan or intereat-bewing aeourttj.
Id the common run of buslnesB procedure thii4 arailable margtii,
between the current (higher) capihUized value of the property (collat-
eral) and the current (lovcer) cnpitalized value of the aecurlties reatinq
upon it is promptly covered by a fresh credit extension ; whether thdt

inaion takes the set form of loan, bonds, preferred stock, and the
the less patent form of > larger volume of obligations In thi;
contracts and the like, — the resnlt, as touches the securities
and their basis, being that the same nouiiual volume of securities with
the same aggregate Interest charge rests on a (materially) smaller
block of the industrial equipment after this readjustment of capitali-
zation is had than it did when the securities were placed. When
depression ensues, and the rate of earnings and interest declines, the
effective capitalization of the securities with a fixed rate of Income is
iDCieased (it the securities are felt to be secure) to correspond with
the lower rate of interest ; whereas the capitalized value of the block
of indoslrial equipment on which these Hcurities (plus whatever may
have been added in the interval) rest shrinks to correspond with the
aama fscu, A discrepancy, such as was adjusted by a recapitalization
during the interval of high rates, reappeare, but in the inveree sense.
And this discrepancy cannot be correcttid, since the inargin on which
the previous adjustment was made has disappeared, and no oorrewpond-
ing margin on the other side emerges. Busineni accounts do not deal
in negative quantities, except under stress of a necessity that violates
the premises on which business accouni&ncy proceeds.

TteenrrlDg to the notation employed on page 15.^, and letting 1 = par
talne of securities with fixed charges, r = rate per annum of fixed
cbsTgee, 1' = market value (effective capitalization) of these securities.

' yp = r

ktU if int becomes Int' (= Int + diTit), 1'

I 1" = j!-

I (int + ^nt :

cap* at the aame time becomes cap" =
■ In a period of falling loterest,
Int' = int - A Int. and 1"

224 THE THEORY OF BUSINESS ENTERPRISE

charges to meet is the fact that the new invest-
ments, and those concerns that have gone into
bankruptcy or receivers' hands, come into com-
petition with the old. These new or rejuvenated
concerns are not committed to a scale of fixed
charges carried over from a higher interest level;
and these are therefore carrying only such interest
charges as the current effective capitalization of
their property will warrant, whether effective cap-
italization be taken to mean cost of production of
the equipment, earning-capacity of the concern,
or market quotation of its securities. These un-
incumbered competitors are presumed to be making
reasonable profits at current prices, and their pres-
ence in the competitive market therefore precludes
an advance of prices to such a scale as would afford
a reasonable profit to the other establishments after
paying their interest charges on what is, in effect, I
overcapitalized property. ^

This tentative explanation of depression applies
only so far as the period of depression is a time of
relatively low rates of interest. But depression
does not uniformly coincide with low interest
rates ; besides which, there are other facts in the
case which limit the applicabiUty of the explana-
tion formulated above. rTo explain protracted
depression, e.g., this line of argument would be
convincing only on the supposition of a progres-
sively falling rate of interest, — a condition not

commonly met with in a protracted period of
depression.

But this explanation, applicable within a limited
range of the phenomena that make up a period of
depression, points the way to another class of con-
siderations that go far toward explaining the rest.
It appears that the phase of the difficulty covered
by this explanation is traceable to a discrepancy
between the accepted capitalization, the interest
charges, and the eaming-capacity/ And it appears
equally plain that the only remedy applicable to
the case (barring a speculative exaltation of biisi-
nesfl) is a recapitalization of the concerns affected
on a lower basis, to fit the lowered cost of pro-
duction of the equipment and its lowered eaming-
capftcity. But under existuQg conditions of law
h a remedy cannot be applied to the interest-
ng securities, — except by process of insolvency,
— and it is very reluctantly applied to other capi-
talized wealth; besides which it is, practically,
very difficult to effect such an avowed recapitaliza-
tion as applied to the stock of incorporated com-
panies, particularly in the case of those whose
stock is ostensibly the capitalized value of their
plant.

Such a readjustment of nominal value to actual
value as shown by the facta of earning-capacity
is continually going on, in some measure; but
does not cover the entire range of facta involved.

Hjnch
^P^earii
^*— an

It it I

Ived, I

THE THEORY OF BUSINESS ENTERPRISE

and it is nearly always of the nature of a reluctant
concession, following only after the need of it has
become somewhat pressing. It can, therefore, in
the common run of cases, not catch up with the
progressive difficulty which it is designed to meet,
in so far as the difficulty is of a progressive
character. ;

/A discrepancy between accepted capitalization
and current earning-capacity, similar to the dis-
crepancy discussed above but of a progressive
character, arises under modern conditioa'? apart
from a fall in the rate of interest. The discre-
pancy pointed out and provisionally disposed of
above, due to a fall in interest rates, ia a discre-
pancy between the nominal value (accepted capi-
talization) of the older establishments, computed on
their earlier earning-capacity or on the original
cost of their equipment, on the one hand, and
their present actual value on the other hand, com-
puted on their current earning-capacity in compe-
tition with rivals that have the advantage of a
lower cost of equipment, or, in other words, a
lower interest charge per unit of earning-capacity.
Under the regime of the later, more fully devel-
oped machine production, a discrepancy having a
similar effect arises out of a persistent divergence
between the paat cost of production of a given
equipment and the current cost of a like or equiva-
lent equipment at any subsequent date, — suppos-

THE THEOKV OF MODEUN WELrAKE

227 I

ig that there intervenes no inflation of pnces and
extraneous cause making for a speculative
Vance.'

Suppose prices of finished goods to be stable or
to vary by inconsequential fluctuations, negligible
for purposes of the argument, and suppose the
rate of interest to be in a similarly negligible
position. In other words, suppose such a condi-
tion as the business community would recognize
ordinary, normal, sound, without ground for
pronounced hopes or fears. Under modem cir-
cumstances, dominated as the modern situation is
by the machine industry, such a state of affairs is
^B'lmstable, even apart from any disturbance of an
^■extraneous kind. It is unstable by virtue of the
forces at work in its own process, and these forces,
on the whole, make for a progressive change in the
direction of depression.
H It has appeared above that the depressing effectX
^■vhich a relatively low (declining) rate of interest
^■has upon industrial business is due to its setting
^Hip a discrepancy between the accepted capitaliza-
^^tion of older establishments and the cost of new
establishments of an equivalent earning-capacity.

' Compare RobaoD, ProhUm a/ the Uaemployfil, ch. V.. and Tugan-
Buanowakf, Eandelikriten, ch. I. and VI. In bia criticlam (pp. 191-
193) TugaB has quil« miased the point of llobaon's theory m well u
ol bis illostratioD, having apparenUy not underBlood Hobaon's expogi-

i, wblcli U, in effect, very HimUar to hu own. Sae also Hobgon,
crn CapftalUm, ch. VII., ecpecially seca, 8 and 10.

228 THE THEORY OF BUSINESS ENTERPRISE

Now, under the circumstances of the more fully
developed machine industry, such as it hae stood
for a couple of decades past, a similar discrepancy
reaults from the gradual but uninterrupted pro-
gressive improvements of industrial processes.
" The state of the industrial arts," as the older
economists are in the habit of calling it, is no
longer to be conceived as stationary, even for the
time being. No " statical " theory of the industrial
arts or of business prosperity is tenable, even for
the purposes of a " statical " theory of the industrial
situation. Progressively increasing efficiency of
the processes in use is a pervading trait of the
industrial situation. No two successive years are
now on the same, or virtually the same, plane in
respect of the efficiency of the industrial arts;
indeed, the " period of production " can no longer
safely be construed to begin and end on the same
^evel in this respect. At the same time the pro-
''gressively wider and more close-knit articulation
of the several industries in a comprehensive process
ia also going forward, and this also affects all
branches of industrial business in some degree
and in the same direction, as will appear presently-
The items of the equipment (plant, materials,
and in a measure even good-will) in which any
industrial enterprise invests, and by the use of
which the business men in industry turn out their
output of vendible goods, are themselves producta

THE THEOKY OF MODEBN WELFARE 229

the machine industry. Machine processesj ever
increasing in efficiencyj turn out the mechanical
appliances and materials with which the processes
are carried on, at an ever decreasing cost ; so that
at each successive step the result is a process hav-
ing a higher efficiency at a lower cost.' This is
now no longer a sporadic effect of ingenious con-
trivances having a local and limited application,
to be handled as trade secrets and exploited aa an
enduring differential advantage.

The cost of production of "capital goods" is
steadily and progressively lowered, as counted in
terms of the processes involved in their production.
In a competitive market this is reflected, with
greater or less promptitude, in the prices of such
capital goods to all buyers. But the buyers whose
purposes this lower scale of prices particularly sub-
serves are chiefly the new investors who go into
business in the way of new industrial establish-
ments or extensions of the old. Each new venture
or extension goes into the competitive traffic of
producing and selling any line of staple goods
with a differential advantage, aa against those that
have gone before it, in the way of a lower scale
of costs. A successively smaller aggregate value
of new equipment will turn out a given volume of

' The IfpicttI tcirui taken by this acceteratloD is tlie machine pro-
dncUon ot mnchinnry, but in fact it iavalves tbe pmductioD nf otber
materia] facton as well as tlie mecbanical apparatiu, notably ilii>
DiateriuU used In liiiluntr)'.

230 THE THEOEY OF BUSINESS ENTERPRISE

vendible product. In so far as there is no collu-
sive control of the output or the prices, this means
that the newcomers will cut under the scale of
prices at which their predecessors have been con-
tent to supply the goods. The run of competitive
prices is lowered ; which means that at the new
competitive prices, and with their output remain-
ing on its old footing as regards expenses of pro-
duction, the older establishments and procesaes will
no longer yield returns commensurate mth the
old accepted capitalization.' From the inherent ^
character of the machine industry itself, therefore, ,
it follows that the earning-capacity of any indus-
trial enterprise enters on a decline from the outset,
and that its capitalization, based on its initial
putative earning-capacity, grows progressively an-
tiquated from the start, j The efficiency of the
machine process in the " instrumental industries "
sets up a discrepancy between cost and capitali-
zation. So that a progressive readjustment of
capitalization to correspond with the lowered earn-
ing-capacity is required by the nature of the case
It is also, in the nature of the case, impracticable

1 Tbe eaUbliBbed concerns having been capitalized on Ibe buis of
paat cost, we can say tliat in the older eatablialimeuts, cap =/ (coat),
Iral in the new establishments with an equal eamiDg-capacitj, capi =
f (ooflti = oort — A coet) ; hence the rale ot eaminjjB 1 =/ \—^^ | I
Trill be progreuiTd; higher u cost deoreasea : —

,(»-1</f ?! l<r( 2 \,i^

THE THEOE.Y OF MODERN WELFARE

In BO far as the process of investment and business
roaDagement involves the use of credit, in the way
of interest-bearing securities or loans equivalent to
such securities, thia element of credit retards the
readjustment by force of the fixed charges which it
involves. This retardation (aided as it is by the
reluctance of business men to lower their capitali-
zation) is of sufficient effect to hinder recapitalizar
tion, on the whole, from overtaking the progressive
need of it, with the result that a fair or "ordinary "
rate of profits on industrial investments is not per-
manently attainable in the field of open competi-
tion. In order that the rate of interest should
effectually further business depression in this way,
therefore, it is not necessary that the rate should
rise or fall, or that it ahould be relatively high or
low, or that it ahould be uniform over the field,
but only that there should be a rate of interest in
each case, and that there ahould be some appreciable
volume of credit involved in industrial investments.
Credit is, in fact, a ubiquitous factor in modem
industrial business, and its effects in the way
indicated are therefore to be counted in ae a
constant force in the situation.

However, even apart from the presence of this
ubiquitous credit element, a similar effect would
probably result from the progressive enhancement
of industrial efficiency when this enhancement pro-

tat such a rate as has been the case for some
_

232 THE THEORY OF BUSINESS ENTERPRISE

time past. As baa been shown in an earlier
chapter, business men keep account of then: wealth,
their outgo and their income, in terms of money
value, not in terms of mechanical serviceability or
of consumptive effect. Business traffic and busi-
ness outcome are standardized in terms of the
money unit, whUe the industrial process and ita
output are standardized in terms of physical
measurements (mechanical efficiency) . In the cut^
rent habita and conventions of the business com-
munity, the unit of money is accepted and dealt
with as a standard measure. The stability of the
standard unit cannot be efEectuallj questioned
within the scope of business traffic. According to
the practical metaphysics of the business com-
munity, the money unit is an invariable magnitude,
wliatever may be true of it in fact. A man
imbued with these business metaphysics and not
given to fine-spun reflection, as business men com-
monly are not, is richer or poorer in his own
apprehension, according as his balance sheet shows
a greater or less number of these standard imits of
value. Investment, expenses, vendible output,
earnings, 6xed charges, and capitalization run in
terms of this value unit. A reduction of earnings
or of capitalization, as rated in terms of the value
unit, is felt as an impoverishment. The reduction
of capitalization in these terms is. therefore, a hard-
ship, which is only reluctantly and tardily submitted

to, even if it carries no hardship in the way of a
reduced command over the material means of pro-
duction, of life, or of comfort- A business man's
rating in the business community likewise rests on
the pecuniary magnitude of his holdings and his
transactions, not on the mechanical serviceability of
his establishment or his output ; and this business
rating is a large part of the business man's every-
day ambition. An enhancement of it is a source of
secure gratification and self-respect, and a reduction
of it has a very substantial contrary effect.' A reduc-
tion of the pecuniary showing is submitted to only
reluctantly and tardily, after it has become unavoid-

J Becurring W Ihe notalioo employed in n
■i|iL=: unit of material efficiency, Uien a give

t« 2, ptige 168, and letting
esUibliabed coQcani, A,

I a. t^'ien equipment K.(cap). *17'.{cap)<» [7,(cap)«> C.f

.int;-

preaentlj fiods iueif in competition with a. joanger oonceni, B, having
an equivalent material equipment = ^.(cap)* procured al a lower cost
and requiring lower earnings (= ea') and lower fixed charge*.

P«Ccap)t

-Rg

int

= i7,(cap'= cap — Acap).

But {7_(cap)(= IL(cap)i aa competitors in the market. Hence, with
the competitive lowering of earnings, and therefore ofeflectlTe capitali-
latlon. A's account comee to stand : —

D'-(cap),*t/,{oap') = P.(«P- AcapX F.fcap).
In effect A 1b orercapltalieed by t7.(cap — cap'). A's nominal capital,
r'.(cap).'>P'.(oap'+acap), while A's effective capitalization

K(cap').= (7,(cap — A cap).
The businen man's sensibilities in the case, therefore, Buffer a lealon

-u,r-

int

which Is ft moaotonic function. The discrepancy between U»(ptp)t and
PiCoapO is. in I«rge part, embodied in securities with fixed charge* ;
which makes a readjuatment very difScult even apart from A'h
ttluctance.

THE THEOEY OF BUSINESS ENTEKPRISE

able, and only to the least feasible extent. But under
conditions, such as now prevail, which involve the
requirement of a progressive rerating of this kind,
this reluctant coucession never overtakes the need of
readjustment, — and the discrepancy between capi-
talization and eaming-capacity is therefore chronic
so long as no extraneous circumstances come in
temporarily to set aside the trend of business
affairs in this respect. | It may, therefore, be said,
on the basis of this view, that chronic depression,
more or less pronounced, is normal to business
under the fully developed regime of the machine
industry.'!

This deplorable trend given to busineas by the
excessive prevalence and efficiency of the machine
industry can, however, be set aside by several
factors more or less extraneous to tlie industrial
system proper. /Even within the mechanical sys-
tem of industry there is at least one factor of some
consequeuce that consistently acts to mitigate the
trend indicated, and that may even put it in abey-
ance from time to time. As lias been pointed out
above, questions of business are fundamentally
questions of price. A decline of prices which

' With the above analysis may be contruied Man's dlscunion
of the declining rate of proflta and the manner in which be conc«lTee
oTerproducUon, specnlaiion, and crises to arise oat of the tendency (it
proflts to a minimum. {KapUat, vol. III. ch. XV.) In the same oon-
nection, see Tugan-Boranowsky's orilioism of Marx, HandeUkriten,
Ch. VIL

I THE THEORY OF MODERN WELFARE 235
dely toucheB business interests brings depression.
vAjnversely, an appreciable advance in prices, from
whatever cause, means improvement in business.
Sncli an advance in prices may come of a specula-

»tive movement ; which in turn may arise from a
variety of circumstances, for the most part circum-
stances extraneous to the industrial process. For
the present, however, the question of a speculative
movement is best left on one side. Another factor
touches the case more intiuiately. As has more
than once been the case, prices may be advanced
through a freer supply of the precious metals, or
by an inflation of the currency, or a more facile use
of credit instruments aa a subsidiary currency
mechanism. Now, the growing eflBciency of in-
dustry has an effect in lowering the (material) cost
of production of the precious metals and so in-
creasing the ease with which they are supplied,
after the same manner as it affects the supply of
goods for industrial or consumptive use. But the
increased supply of the precious metals has, of
course, an effect upon prices contrary to that ex-
erted by the increasing supply of goods. In so far
as this effect is liad, it acts to correct or mitigate
the trend of business toward chronic depression^),/^

In point of direct material sefTiceability, no doubt, a [resh supply
the preciouB metab ii one of the least useful forma of wealth lo
production of which induatrial effort can be ilirecwd, but for ihr
Mesof business proeperity at large it in probably the most nerviLf.
addition that can be made to lUv nggregata nealth. Hapldly

236 THE THEOBY OF BUSINESS ENTERPKISE

But certain circumstauGes come in to qtialify the
salutary effect of a lowered cost of the precious
nietala. Improvements in the industrial processes
affect the (industrial) cost of production of the
precious metals in a less degree than the cost of
other goods ; at least, such seems to have been the
case recently. But beyond this, and of graver
consequence, is a peculiarity affecting the value of
the money metals. The annual product of the
money metals is not annually consumed, nor nearly.
The use of them as money does not consume them
except incidentally and very slowly. The mass of
these metals in hand at any given time is very
considerable and is relatively imperishable, so that
tlie annual accretion is but a small fraction of the
aggregate supply. The lowered cost of the annual
supply has therefore but a relatively slight effect
upon the aggregate value of the available supply.

The case is different as regards the annual out-
put of vendible products, whether for industrial or
consumptive use. In this case, and particularly as
regards this matter of new investments and exten-
sions of industrial equipment, the annual output
counts for by far the greater factor in making the
current value of the available supply, if indeed it

increasing efflcienej' in the production of otiier foraiB of wealUi ia detri-
mental to Ibe business interests, in that it brings depreuion ; but k
t&pid increase of the precinui melftla ia the most fortunate material
circumatance for tlm bnsiness interesle that induatrlnl activity can
bring, becaiue It putu uH d^prtrsaion by keeping up prices.

THE THEORY OF MOr>KRN WELFARE 237

I is not to be regarded as substantially the only
factor that comes in question here. Accordingl}',
it is only under very exceptional circumstances, at
times when the precious metals are supplied with
extraordinary freedom, that the increased output of
these metals can offset the trend of business toward

t depression. Ordinarily this factor can count for
no more than a mitigation of the " tendency of
profits to a minimum." And even this mitigating
effect, it may be remarked, appears to be of less
radical consequence for the general situation of

I business now than it was during the earlier phases
of the machine industry's r(>gime. The most telling
effect of an increased supply of the precious metals
seems to be the incitement which it gives to
speculative inflation.^
It will be noted that the explanation here offered
of depression makes it a malady of the affections.
The discrepancy which discoiu-ages business men is
a discrepancy between that nominal capitalization
which they have set their hearts upon through
habituation in the immediate past and that actual
capitalizable value of their property which its cur-
rent eaming-capacity will warrant. But where
the preconceptions of the business men engaged
t have, as commonly happens, in great part been

t, Siiidiei in KeonomlOtEvMjyi.,
[ Dilrlbvtlon of heomr. bk, II, ch. HI.

" Musi Prices Fall ?

238 THE THEORY OF BUSINESS ENTERPRISE

fixed and legalized in the form of intFerest-bearing
securities, this malady of the afEections becomes
extremely difficult to remedy, even though it be
true that these legalized affections, preconceptions,
or what not, centre upon the metaphysical stabil-
ity of the money unit.

But while it is true that depression is primarily
a business difficulty and rests on emotional grounds,
that does not hinder its having grave consequences
for industry and for the material welfare of the
community out-side the range of business interests.
Business enterprise, it is true, proceeds on meta-
])li}sical grounds and is swayed by considerations
of nominal wealth rather than by considerations of
material serviceability ; but, none the less, business
enterprise and business metaphysics control the
course of industry.

J Dull times in business means dull times in in-
ustry, of course. But a caution is necessary on
this head. The yearly output does not usually
vary extremely between brisk and dull times,
except as measured in price) As measured in
material terras the discrepancy in the volume of
output between brisk and dull times is much less.
The gross output as measured by weight and tale
is less in dull than in brisk times, other things
equal ; but the deficiency as measured in these
terms is much less than the price returns would
indicate. Indeed, the output as measured b;

THE THEORY OF MODERN WKLFARK ^^iO

weight and tale need not average very appreciably
leas during a protracted depression than during a
preceding period of good times.' The volume of
busineaa as well as the volume of output (by weight
and tale) of industry may increase during a few
years of depression at nearly if not quite as high a
rate aa during a. corresponding period of good
times. A transition from dull to brisk times, how-
ever, commonly if not invariably involves a rapid
increase in values, while a converse transition
involves a corresponding shrinkage of values,
though commonly a slower shrinkage, — except
where a crisis intervenes.

The primary hardship of a period of depression
ia a persistent lesion of the affections of the busi-
ness men ; the greatest secondary hardship is what
falls upon the workmen, in the way of partial
unemployment and a decline in wages, with conse-
quent precariousness and reduction of their liveli-

• Work goes on during dull times, though at a. Blackened pace, and
•xteiuioiie and improvemeoU are continually being made. The volume
o( output coiwcqupntly increaaea. «o that, even if there haa been a sei-
bkCk to production at the beginning of the depreasion, ilie aKgregaie
output presently again reacliea the volume which It had when the
dull Uines »et In. It may be added Lbat the rale of cnnsumptmn Ik
aiaa appreciably lower during dull times, particularly In tbe more
WHtelul forma of conaumptlon. This lowered aggregate consump-
tion obets the lowered Intcnaity of production during dull timea to
mch aa extent that it ia probably aafe to aay that the net aur-
plus product, measured by weight and tale, la at least not appreci-
mbly amaller during depreaaiou than during prnaperlty. Cf. Carroll
D. Wright, Testimony in Report of the Initnilrial Commiuion, vol.
Vn. p. 26.

■^^{\ TJIE THEUKV OF BUSINESS ENTERl'KISE

hood.' For those workmen who continue to find
fairly steady employnient during the depression,
however, even at reduced wages, the loss is more
apparent than real ; since the cheapening of goods
offsets the decline in wages. Indeed, the cheapen-
ing of the means of living is apt to ofEset the fall
in wages fully, for such workmen as have steady
Work. So that in the case of the workmen also,
as well as in that of the business men, the distress
which dull times brings is in some part a spiritual,
emotional matter.

To the rest of the community, those classes that
are outside of business enterprise and outside of
the industrial occupations proper, that is to say,
those (non-industrial) classes who live on a fixed
salary or similar fixed income, dull times are a
thinly disguised blessing. They suffer in their
affections from the reflected emotional detriment
of the business community, but they gain in their
ease of livelihood and in their savings by all the
difference between the price scale of brisk and of
dull times. To these classes an era of prosperity
brings substantially nothing but detriment.*

< The reduced scale of living of the working popoialion is the chief
factor that counts as an offset against the reduction of the groas pro-
duction during dull limeB, tia Indicated above.

' Cf. articlea by G. Caaael, "Om Kriser och Daliga Tider," now
running in EkonomUk Tidakri/t (1(HM, Nos. 1 and 2), lor a parallel
diacUBsfon of the topics here -dealt with. Mr. CssBel's exposition con-
nects more closely with the received notions of Capital, Production,
etc. , and goes more Into detail at certain points, particularly on Svrli^

; 241 1

THK THEORY OF MODERN WELFARE

/Depression is primarily a malady of the affec-
tions of the business men. That is the seat of the
difficulty. The stagnation of industry and the
hardships suffered by the workmen and other
classes are of the nature of symptoms and
secondary effects. /Any proposed remedy, there-
fore, must be of such a nature as to reach this
emotional seat of the trouble and restore the bal-
ance between the nominal value of the business .
capital engaged and the earnings of the business;/
that is to say, a remedy, to be efficacious, must
restore profits to a "reasonable" rate; which
means, practically, that prices must be brought to
the level on which the accepted capitalization has
been made. / Such a remedy, to offset the disastrous
cheapening of products through mechanical improve-
ments, has been found in business coalitions and 'i
working arrangements of one kind and another, {
looking to the " regulation " of prices and output//
Latterly this remedy is becoming familiar to the
business community as well as to students of the
business situation, and its tangible, direct, and
unequivocal efficiency in correcting this main
infirmity of modem business is well recognized.
So much so, indeed, that its urgent advisability
has been formulated in the maxim that " Where

lDTeslmeQt(Kaplulbildiiiiig),iLnd Pecuniar; ExpectaDcy(Vl>iitaiidetj.
HIb exposition is not yet completed, but bo far as may be gstbered from
what hu come tv hand, he ahould teach BUbstanllaUy the Bame out-
u that given above.

^H what has I
^^H coineu tli

242 THH THEORY OF HUSINESS ENTERFRISK

combination is possible conipetltiou is impossible."
What is required is a business coalition on such a
scale as to regulate the output and eliminate com-
petitive sales and competitive investment within a
field large enough to make up a self-balanced,
passably independent industrial system, — such a
coalition of business enterprises as is loosely called
a " trust."/

Such a business coalition, if it is comprehensive
and closely controlled, can adjust the output of
goods and services to the market with some nicety,
and can maintain the balance of the ruling prices,
or the price scale agreed upon, with such effect
that the received capitalization need not become
obsolete even in the face of very radical improve-
ments in the processes of iaduatry.J Its effect, in
the case of ideal success, is to neutralize the cheap-
ening of goods and services effected by current
industrial progress. It offsets industrial improve-
ments in so far as these improvements affect the
cost of goods more than they affect the value of
the money metals. It might seem at first sight
that by this inhibitory effect of the trust the
entire advantage derivable from industrial improve-
ments within the scope of the trust should inure to
the gain of the business men in the combination,
but such does not appear to be the practical out-
come. The practical outcome appears more nearly
to be that material advantage inures to no one from

THE THEOKY OF JIODEEK WELFARE 243

indostrial iniprovements under the control of the
trust, in so fur as the trust successfully carries its
point. This feature of trust management will be
taken up again in a different connection.

In addition to its prime purpose of checking the
decline of earnings on past investments, such a
business coalition is also enabled to distribute any
unavoidable effect of the progressively reduced co«t
of production of the productive goods employed,
somewhat equably over the entire field of industry
comprised iu the coalition, and so obviate the press-
ure of this untoward industrial progress falling with
exceptional severity at any given point. Econo- !,
mies effected are at the same time made to accrue to
the collective business organization, showing them-
selves in the way of increased dividends and
increased effective (market) capitalization of the
coalition's property, instead of being dissipated in
competitive selling, and so going to the body of
consumers or to the industrial system at large.

To return to a point temporarily set aside above.
By supposition, in what has just been said, any-
thing like a speculative inflation has been excluded
from the discussion of busine.S3 depression ; and
necessarily so, since the two do not come at the
same time. But at one point the two show a
feature in common. Under both of these two
widely different conditions of the business situation

241 THE THEORY OF BUSINESS ENTERPRISE

there \b a discrepancy between the accepted capital-
ization and the actual earning-capacity.' But the
two differ even at this point in that, in the case of
inflation, the discrepancy is not felt until the climax,
when a widespread realization of the discrepancy
brings on an abrupt readjustment, in the crisis
which follows inflation ; whereas in a period of
depression ttie sense of this discrepancy and the
protest against it is the moat striking circumstance
of the case. The discrepancy between capitaliza-
tion and earning-capacity in a period of speculative
movement comes of an inflation of capitalization ;
whereas in time of depression the discrepancy is
due to a shrinkage of earning-capacity, — both
capitalization and earning-capacity being, of course,
counted in terms of money values. A speculative \
movement offsets or cbecka the trend to depression
whenever it occurs ; and for some appreciable time
past, such speculative movements appear to have
been the only force which has from time to time
broken the otherwise uninterrupted course of busi-
ness depression. Under the regime of a perfected
■ In the case of a Bpeculative inflation,

cap = -55. X _L < cap' = «±*« X i ;

•^ coat lilt coat Int

In cue of depreasioa,

cap' = ^ , > cap" = *^ ~ ^.^ -

coat X int coel x int

In tbe former case Ihe current capitalization during inflaUon, be-
ing cap', exceeds tbe bona Me capital value as proved by events, Ckp ;
while In tbe cue of depression the nominal capita], being cap', ezceedl
the capitallEatlon wuranted by current eamlng-capaclly, cap".

THE TIIE^i.lY OF MODERN WELF.VRE 245

l-Biachine industry and a perfect business organizai^
I'tlon, mth active competition throughout, it is at
■ least probable that depression would not be seri-
I ously interruptfid by any other cause. '

But it has been a point of economic dogma in
I modern times — not to call it a point of theory,
since it is not held on reasoned grounds — that
depression and inflation, followed by crisis, succeed
one another with a rough periodicity, interminably
t and in the nature of the case. The periodicity
[ (with an interval of some ten to twelve years from
phase to phase) has not been established with any
cogent show of evidence, except for the period from
I 1816 to 1873 ; and even within that period the
[ evidence has not been convincing to all students o£
t^ese phenomena. A tentative explanation of the
I periodicity, such as there may have been within
I that period, as well as of its absence before and
after the period in question, may be offered on the
basis of the views here set forth. Keeping in mind
the point that the disturbance, both in the case of
inflation and in that of depression, is a discrepaucjt*
between ra pitalization and eaming -capacity, and
, also the manner in which this discrepancy arises,
I it may be said that prior to the earlier date men-
tioned the modem industrial system was not such
a comprehensive and articulate process that a dis-
turbance in one part or one member of the system
Laeed be transmitted furthwith through the channels

246 THE THEORY OF BUSINESS ENTERI'RISE

of business to all the rest. A speculative move-
ment need not spread forthwith throughout the in-
dustrial system. The great episodes of speculation
and collapse that occurred during earlier modem
times were not of the nature of speculative inflar
tion affecting the entire business community occu-
pied with industry. They are rather of the nature
of commercial speculation verging on gambling.'
So also, the crises of that earlier time, when they
were not collapses of gambling ventures, were com-
monly produced by some great disaster which
brought an absolute material loss upon the com-
munity, such as crop failures, invasions, or heavy
war expenditures. On the other hand, as regards
periods of depression prior to the early years of the
nineteenth century, they were also rare if not
unknown, except when due to failure of resources
or the burdens of government. The conditions
out of which depression could come, as a persist-
ent disturbance of business through a divergence
between the capitalization and the earning-capac-
ity of investments, were not had. The developed
machine system was absent, and without this the
cost of production of productive goods could not

■ So impreaaive a Eaci has Uio gambl ing character of early perlocb of
inflalian and crises been that it has led tconomisU to look for gambling
aa a matter of course in lat^r phenomena that have been claaBed as b-
flalion and crises, even when no gambling element has been obTional;
present. Il has been fell that gambllog must presumptively b« pra-
ent whenever there is inflation or crises, because the showing of earlier
history runs thdt way.

I
I

THE THEORY OF MODERN WELFARE 247

be progressively lowered at a rate large enough
to set up and maintain a persistent divergence
between capitalization and eaming-capacity in in-
dustrial enterprises. —
[At some uncertain point in the first half of the
nineteenth century the system of machine industry,
and the business system based upon it, attamed
such a breadth and consistency that business disturb-
ances of appreciable magnitude in any part would
affect values tliroughout the system.t/ It had then
grown 80 large and was so closely' articulated a
structure that the relations of its members to one
another and to the system aa a whole were of
greater moment for the fortunes of these members
and for the orderly process of the whole than were
the relations of the members to industrial factors
lying outside the system of the machine industry
and the business community. Hence industrial
crises in the proper sense of the word seem well at
home in this period. They spread with great force
and facility whenever they came ; and they had the
true character of business crises, in that they ran
with great severity without involving an appreciable
aggregate loss of material wealth, except in terms
of price. They commonly meant a cancelment of
■values, without appreciable aggregate loss of goods.
They seem also to have been true to the staple defi-
nition of crises in that they followed upon a period
of speculative inflation in industrial investments.

248 THE THEORY OF BUSINESS ENTEEPRISE

Chrouic depression, however, does not seem to
belong, as a consistent feature of the course of
things, in this nineteenth-century period, prior to
the eighties or the middle of the seventies. The
osual course, it is commonly held, was rather :
inflation, crisis, transient depression, gradual ad-
vance to inflation, and so on over again.'

On the view of these phenomena here spoken
for, an attempt at explaining tliis circuit may be
made as follows : /A crisis, under this early nine-
teenth-century situation, was an abrupt collapse of
capitalized values, in which the capitalization was
not only brought to the level of the earning-ca^
pacity which the investments would have shown
in quiet times, but appreciably below that level/
The efficiency and the reach of the machine indus-
try in the production of productive goods was not
then so great as to lower the cost of their produc-
tion rapidly enough to overtake the shrinkage in
capitalization and so prevent the latter from rising
again in response to the stiraiUus of a relatively
high eaming-capacity. The shock-effect of the
liquidation passed off before the cheapening of the
means of production had time to catch up with
the shrinkage of capitalization due to the crisia, so
that after the shock-effect had passed there still
remained an appreciable undercapitalization as a

' Cf.,e.g.,B'arton, Crises and Depreuiom,ch.VJlI., for an
ucooDt of deprealons &ud criaes in the Uoiled Statu during thia poitod.

THE THEORY OF MODERN WELFARE 249

sequel of the period of liquidation. Therefore
there did not result a persistent unfavorable dis-
crepancy between capitalization and earning-capao-
ity, with a consequent chronic depression. On
the other hand, the eaming-capacity of invest-
ments was high relatively to their reduced capitali-
zation after the crisis. Actual eaming-capacity
exceeded the nominal eaming-capacity of indus-
trial plants by so appreciable a margin as to
encourage a bold competitive advance and a
sanguine financiering on the part of the various
business men, so soon as the shock of the liquida-
tion had passed and business had again fallen into
settled channels. But auch a bold competitive
advance means the beginning of an extension of
credit and a speculative movement in industry,
8uch as has been discussed some pages back in
connection with crises. This movement has a
cumulative character, after the manner there in-
dicated, and its outcome is an inflation of capi-
talization and a large extension of credit, which
normally ends in a period of liquidation.

Within the period spoken of (1816-1873) this
liquidation is apparently always brought on by
flome extraneous disturbance. But it seems that
the theory would require us to say that the extra-
neous disturbance requisite to bring such a specu-
lative movement to a head will be slighter the
farther the movement has gone; so that in the

THE THEOKY OF BUSINESS ENTERPRISE

earlier stages of a given period of inflation a
liquidation could be brought on only by some
relatively violent disturbance, whereas at a higher
phase of speculative inflation a relatively slight
p disturbance would suffice.

Now, it takes some time for such a speculative
movement to bring on so large a discrepancy be-
tween capitalization and eaming-capacity as may
not be adjusted by other means than a widespread
and severe liquidation.' Hence a rough periodicity
in the recurrence of these seasons of buoyancy and
of collapse in capitalized values. Other factors,
and varying ones, have, no doubt, been present in
each of the historic crises of the nineteenth century,
and these other factors would have to be taken
due account of in any history of crises, and even in
any theory of crises, which aimed at anything like
an exhaustive treatment ; but the factors here
pointed out seem to be the characteristic and con-
stant ones in the sequence of crises within this
period, at the same time that they are the factors
which are in a peculiar degree connected with that
process of busmess management in modem in-
dustry which is the objective point of the present
inquiry.

Since the seventies, as an approximate date and

> The ■pecalatiTe inovement requires time, becaUBe Uib influlon la
1 cnrnulative one n.tui is carried t>\H imlntenlionaltf and In a mhw
unconsciously.

THE THEORY OF MODERN WELFARE

as appljdng particularly to America and in a less
degree to Great Britain, the course of affairs in
business has apparently taken a permanent change
as regards crises and depression. During this
I recent period, and with increasing persistency,
' chronic depression has been the rule rather than
the exception in business. Seasons of easy times,
*' ordinary prosperity," during this period are
pretty uniformly traceable to speci6c causes ex-
traneous to the process of industrial business
proper. In one case, the early nineties, it seems
1 to have been a peculiar crop situation, and in the
I most notable case of a speculative inflation, the
one now (1904) apparently drawing to a close, it
was the Spanish-American War, coupled with the
expenditures for stores, munitions, and services
incident to placing the country on a war footing,
that lifted the depression and brought prosperity
Lto the business community. If the outside stimu-
ilus from which the present prosperity takes its
impulse be continued at an adequate pitch, the
season of prosperity may be prolonged ; otherwise
there seems little reason to expect any other out-
come than a more or less abrupt and searching
Uqajdation.

What would be an adequate pitch of the stinui-

llus making for prosperity is, of course, not easy to

lay, but it is probably safe to say that in order to

keep up the .season of prosperity for a considerable

252 THE THEOKY OF BUSINESS ENTEEFRISE

\ number of years tke stimulus would have to be

\ gradually increased. That is to say in other

Vvords, the absorption of goods and services by

Axtra-industrial expenditures, expenditures which

is seen from the standpoint of industry are pure

/waste, would have to go on in an increasing

/ volume. If the wasteful expenditure slackens, the

/ logical outcome should be a considerable perturbar

/ tion of business and industry, followed by depres-

/ sion ; if the waste on war, colonization, provincial

investment, and the like, comes to an abrupt stop,

the logical consequence, in the absence of other

counteracting factors, should be a crisis of some

severity.'

' These extrvindustrial expecditores that have brongbt prosperity
B here spoken of as wsat«Fu1, not thereby implying that they ma;
it be beneficial to the community even in respect U> their effect upon
the aggregate iacome or the aggregate accnmulation of wekltli in Uw
community. They are called wastcfal simply because these expendi-
tures directly, in their first incidence, merely withdraw and dissipate
wealth and worli from the industrial process, and unpiodncUvely con-
Rnme the products of industry. Indirectly they bare a beneficial
aggregate efiect upon industry by inducing an employment of the foil
productive efficiency of the Industrial apparatus ; so that in a very
Hhort time, it is at least conceiTable, the aggregate net output of the
industrial process may be as large and serviceable u before the mslefal
expenditures were entered upon, even with the deetructlon of tbU
portion of llie product which goes to maintain the wasteful expendi-
tures. At the same time, the eSect upon busineas must be held to be
patently favorable. The wasteful expenditures enhance demand and
so Increase the vendibility of the output, — they Increase profits and
raise capitalization. They therefore act unequivocally to advance the
valuer of the bushiese men's holdings and increase their gains, as
oonnted in business t«mis. The wasteful expenditure is good for trade.
It is only in the eventual liquidation that a disadvantageous b
consequence comes in vieiv.

THE THEOIfY OF MOPKHX WKLFvVKE

^H It was said above that since the seventies the
ordinary course of affairs in business, when un-
disturbed by transient circumstances extraneous to
the industrial system proper, has been chronic
depression. The fact of such prevalent depression
will probably not be denied by any student of the
situation during this period, so far as regards
America and, in a degree, England.' For the
Continent of Europe this characterization would
have to be materially qualified. But the reply is
ready to hand that governmental interferences with

P trade have been so ubiquitous on the Continent,
particularly in the German-speaking communities,
that their case is fairly to be thrown out of any
general theory. It may also be questioned whether
the industrial system of Germany, c.(/., tlu^ughont
this period conforms to the requirements of the
theory in respect of the degree of development of

It nill be eeea that on this Tien of the effect of wasteful expendi-
ture Ihe position occupied by some early economifltH, oh MalthuB,
Lftuderdale, Chalmers, and otbera, aa well as by some later ones, fts
RobertaoD, Hobaon, is subatanljally well tafcen, although llie defence
of waste which these econoiuisls offer maybe locomplele. Waste
Mems oecessary to keep trade brisk, and therefore to keep ilie indns-
irial processes working at their full capacity. The ulterior reason fur
this staM of the cam being the fact that the deciaive ground which
deiermineathemar^nof activity in business, and therefore in industry,
is the business men's reluctance to accept a reduction of profits aa
measured in tenna of price. The npponentii of the Malthusian view
failed to appreciate the decisive Importance of price, as contrasted
with BervioeabiUty, among the motives on which business proceeds.

1 The objection would not come unexpected that this stAl« of the
oaae is not to be taken as normal, — a point of opinion not readily to
bt dMidcd, oiuoe it reals on a difference Ln the point of view.

2'A THE THEORY UF BUSINESS ENTERPRISE

the machine industry which such a state of affairs
supposes.^

The explanation of this persistent business
depression, in those countries where it has pre-
vailed, is, on the view here spoken for, quite
simple. By an uncertain date toward the close of
the seventies the advancing efficiency and articu-
lation of the processes of the machine industry
reached such a pitch that the cost of production of
productive goods has since then persistently out-
stripped such readjustment of capitalization as has
from time to time been made. The persistent
decline of profits, due to this relative overproduc-
tion of industrial apparatus, has not permitted a
consistent speculative expansion, of the kind which
abounds in the earlier half of the nineteenth cen-
tury, to get under way. When a Speculative
movement has been set up by extraneous stimuli,
during this late period, the inherent ajid relatively
rapid decline of eaming-capacity "on the part of
older investments has brought the speculative in-
flation to book before it has' reached such dimen-
sions as would bring on a violent crisis. And
when a crisis of some appreciable severity has come
and has lowered the capitalization, the persistent
efficiency and facile balance of- processes in the
modem machine industry has overtaken the de-
cline in capitalization without allowing time for

' CI- Somtwrt, £ii;n(<i{(sinui, ToL L oil. XVUL-JUC.

THE THEORY OF MODERN WKLFARE 250

recovery and coiisequeut boom, Tlie cliea,peni:ig
of capital goods has overtaken the lowered capi-
talizatioD of inveetmeuts before the shock-effect of
the liquidation has worn off. Hence depression is
normal to the industrial situation under the con-
summate regime of the machine, so long as com-
ETi*>tHion is unchecked and no 'deiiv ex machina
rposes.'
he persistent defection of reasonable profits^
! for a remedy. The remedy may be sought in
or the other of two directions: (1) in an in-
creased unproductive consumption of goods ; or (2) ,
in an elimination of that " cutthroat " competition |
that keeps profits below the "reasonable" level.'
^H2f enough of the work or of the output is turned '
^Bn wasteful expenditures, so as to admit of but a
relatively slight aggregate saving, as counted by
weight and tale, profitable prices can be main-
tained on the old basis of capitalization. If the
waste is sufficiently large, the current investment
in additional industrial equipment wUl not be suf-
ficient to lower prices appreciably through compe-
titipn.'

^iVasteful expenditure on a scale adequate to
offset the surplus productivity of modem industry
is nearly out of the question. | Private initiative

' Ct Hobeon. Problem of tht Untrapluytd, Appendix to oh. V.
■ Cf. Hobaon, ProUtm of the Unemployed, ch. VI. Mr. RoImou
_dOM not tue the term " nMte" Id tbb ooiuectloii. A1k> Tialla.
mvMtton, QuAl chapter.

256 THE THEORY OF BUSINESS ENTERPRISE

cannot carry the waste of goods and services to
nearly the point required by the business situa^
tion. Private waste is no doubt large, but business
principles, leading to saving and shrewd invest-
ment, are too ingrained in the habits of modem
men to admit an effective retardation of the rate /
of saving.' Something more to the point can be
done, and indeed is being done, by the civilized
governments in the way of effectual waste. Arm-
aments, pubUc edifices, courtly and diplomatic
establishments, and the like, are almost altogether
wasteful, so far as bears on the present question.
They have the additional advantage that the pub-
lic securities which represent this waste serve as
attractive investment securities for private savings,
at the same time that, taken in the aggregate, the
savings so invested are purely fictitious savings
and therefore do not act to lower profits or prices.
Expenditures met by taxation are less expedient
for this purpose ; although indirect taxes have the
pecuhar advantage of keeping up the prices of the
goods on which they are imposed, and thereby act
directly toward the desired end. The waste of
time and effort that goes into military service, aa
well as the emplo3Tnent of the courtly, diplomatic,
and ecclesiastical personnel, counts effectually in

> "Saving" M the ume Ume taken place automUloallr is Um
cnmnt openlioni of coaliUou and Incoipoialion, aa Indicated aboro,
pp. lee-lTfl.

I
I

THE THEORY OF MODERN" WELFARE 257

the aame direction. But kowever extraordinary
this public waste of substance latterly has been, it
is apparently altogether inade^ijateto offset the
surplus productivity of the machine industry, par-
ticularly when this productivity is seconded by the
great facility which the modem biisiness organiza-
tion affords for the accumulation of savings in
relatively few hands. There is also the drawback
that the waste of time involved in military service
reduces the purchasing power of the classes that
aire drawn into the service, and so reduces the
amount of wasteful consumption which these
classes might otlierwise accomplish.'

So long as industry remains at its present level

' Hobson {Problem of the Unemployed), whose aoalysis ol Otbt-
productioQ and its reUtioo to depresaioa goes larthei than any other,
nTiewsaiidcrlUcisea(ch. VIII.) the paUiative measures that Itave been
advocated. He finds them, all and several, inadequate and inconae-
qnent, In that they do not touch the root of the evil — oversaving or
'■ miderconBtimption." They do not touch this because they do not
mitigate the automatic saving and iDvestment process that necessarily
goe» with the poaaessf on of large private incomes. But in point of practi-
tai efficJeDcy his own propoaed remedies must also be scheduled under
tbe head of "palliatives." These propoaed reniedieii are tneasurea
lookbigto A "Reformed Distribution of Consuming Power "(ch. VI.),
socb as taxation of "uoeamed " incomes, higher wages, shorter work-
ing day. The aim ia " to increase the proportion ol the total wealth of
tbe community, which falling to them ns wftges shall be spent In raising
ihegeneraJ standard of workiug-claflsconsumptioo." The contemplated
move is manifestly chimerical in any commuutty, such as the modem
Itidiutrial communities, where public policy ia with growing dogleness
of puipose guided by business interests with a naive view to an increase
ot profits.

Ct also Smart, StudUx in Economies, Essay VIIL, on " Overpro-
dnctlon"; also Essay IX., " The Socializing of CoiiBiuiipUon,"parUca-
tally MC. 8, on "The Limits of ronsumption," pp. 298-206.

^;o8 THE THEORY OF HUSINESS ENTERPRISE

o£ efficiency, and especially ho long as incomes con-
tinue to be distributed somewbat after the present
scheme, waste cannot be expected to overtake pro-
duction, and can therefore not check the untoward
tendency to depression. But if the balance cannot
be maintained by accelerating wasteful consump-
tion, it may be maintained by curtailing and regu-
lating the output of goods.
/*' Cutthroat " competition, that is to say, free com-
petitive selling, can be done away by " pooling the
interests " of the competitors, so soon as all or an
effective majority of the business concerns which
are rivals in the market combine and place their
biisiness management under one directive bead^
When thia is done, by whatever method, selling
of goods or services at competitively varying
prices is replaced by collective selling {" collective
bargaining") at prices fixed on the basis of "what
the traffic will bear," That is to say, prices are
fixed by consideration of what scale of prices will
bring the largest aggregate net earnings, due re-
gard being had to the effect of a lower price in
increasing sales as well as to the reduction of cost
through the increase of output. The outcome, as
regards the scale of prices, may easily be a reduc-
tion of the price to consumers ; but it may also,
and equally readily, be an increase of the average
price. But the prices of the output which is in
this way brought to a monopoly- basis are nearly

THE THEOKV OF MOUIiEN WELFARE

certain to ma more even than prices of the like
output while sold competitively by rival concemS;_J

|What has been said in the last paragraph sup-
poses that the combination of business enterpriaea
so comprehensive as to place the resulting coali-
a position of practical monopolyy Such a
result is not always attained, however, especially
not in the earlier attempts at coalition in any par-
ticular branch of industry ; although the endeavor
is commonly repeated until at last a virtual mo-
nopoly is achieved. But even where no effective
monopoly is achieved, a coalition of this kind has a
salutary effect, at least temporarily. In almost all
a consolidation of this kind is able to effect
tnsiderable economies in the cost of production,
pointed out in an earlier chapter, and such econ-
omies bring relief through enabling the combined
industrial ventures to earn a reasonable profit at a
Jower price for their product than before. They
therefore able to go on on a scale of prices which
'as not remunerative while they stood on their
footing of severalty. But the relief which
imea of such measures, so long as competitive
illing goes on in rivalry with concerns standing
tside the coalition, is only transient. The de-
lining cost of production, and the consequent com-
ititive investment and extension in the industry,
!sently catches up with the gain in economy ;
le margin of advantage in the competition is lost.

260 THE THEORY OF BUSINESS ENTERPRISE

and depression again overtakes the consolidated
enterprises on their new footing. The remedy
again is a wider coalition, making possible farther
economies, and making some approach to a position
of secure monopoly.

I It ia only on a footing of monopoly that this
^grinding depression can be definitively set aside.
But the monopoly need not be absolute in order to
afford a somewhat enduring relief. What is neces-
sary is that the monopoly should comprehend all
but a negligible fraction of the business concerns
and the equipment engaged in the field within
which competition has kept profits below a reason-
able level. What is a negligible quantity in such
a case ia not to be determined on general consider-
ations, since it depends in each case on circum-
stances affecting the particular industry. But, in
a general way, the more nearly complete the mo-
nopoly, the more effectually is it likely to serve ita
purpose."

Such business coalitions have the effect of bring-
ing profits to a reasonable level, not only by

■ The obvioOB remark maj be added, for eompletenees of sUt«-
ment, that, the Tarioua bninchea of iodiunry lend themselves to man-
ageinent by monopoly in eitreniely varying degreea, some, e.g..
fanutug, as an extreme Instance, not being amenable to Qae method
of management under existing circumstances ; others, again, as, e.g.,
retail merchandising, can he managed by this method only to a very
restricted extent ; while at the other end of the scale, In such indos-
tries as railroading, monopolf management, more or leaa unqoallfled,
ii f^rly imaToidaUa.

LTHE THEORY OF MODERK WELFARE 261
lug it possible to regulate output and jaicea,
uu., also by the economies which are made prac-
ticable on this footing. I Coalitions of a less com-
prehensive character, as spoken of above, also
effect economies in the coat of production. But
the larger coalitions which bring the business to
a monopoly basis have not only the advantage
which comes of the large-scale organization of the
industrial process, but they also enjoy peculiar
advantages in the matter of cost, due to their
monopoly position. I These added advantages are
more particularly advantages in buying or bar-
gaining for all goods, materials, and services re-
quired, as well as in selling the output, \ So long
as the coalitions are not comprehensive enough
effectually to eliminate competition, they are con-
strained to both buy and sell in competition with
others. \ But when the coalition comes effectually
to cover its special field of operation, it is able,
not only to fix the prices which it will accept (on
the basis of what the traffic will bear), but also in
a considerable measure to fix the prices or rates
which it will pay for materials, labor, and other
services (such as transportation) on a similar basis,
— unless it should necessarily have to do with
another coalition that is in a similar position of
monopoly/

The rule which governs the fixing of rates on
lis side of the business dealings of a monopolistic

^Hitifl side o

262 THE THEORY OF BUSINESS ENTERl'BISE

coalitioD is Bimilar to that which guides its trans-
actions in the matter of sales. Prices and rates,
as, e.g., for materials and labor, are not depressed
to the lowest possible point, but to the lowest
practicable point, — to the point compatible with
the largest net profits. This may or may not be
a point below the rates necessary under a regime
of competitive buying. It may be added that only
in rare cases does a coalition attain so strong a
position in respect of its purchases (of materials or
services) as to lift this side of its business entirely
above the reach of competition.' /

Wherever this expedient of /coalition has been
found practicable, the chronic depression of recent
times and the confusion and uncertainty which
goes with a depressed competitive business aitna-
tion have been obviated. The great coalitions do
not suffer acutely from the ills of depression, ex-
cept in cases where their industrial processes are
to a peculiar degree in the position of intermedi-
aries within the range of the competitive indus-
tries, as is the case, e.g., with most railroads. But

' Hitherto probably none of the Americau coalitioaa have succmded
In freeing tbemBelTpa from theincniiTenienceB of competitive bidding for
labor, and very few have achieved a pnrely inonopollBtic buying, either
of tDaterials or of any of the vorioua klndtt of services vrblch they re-
quire. With regard lo raw materials alone have gome, as, e.g., the
Standard Oil Company, been able ta compaas an effectual monopoly.
Something approaching this position bas been accomplished by t, very
few other coalitions, ai, r.g.. the Sugar Refineries, Ilie Cotton S«ed
Oil Company, the United SiaTes Steel Corporation, and in a liKal way
certain ooa], r^way, lumber, and warebouGe couipaoles.

I THE THEOKV OF MODERN WELFARE 263
en in such a case the coalition which has a
monopoly is more fortunate aa regards the stability
of its balance sheet than the same traffic would be
without the advantage of monopoly.

^P Parring providential intervention, then, the only
refuge from chronic depression, according to the
view here set forth, is thoroughgoing coalition in
those lines of business in which coalition is i^ac-
ticablej But since this would include the greater
part of those lines of industry which are domi-
nated by the machine process, it seems reasonable
to expect that, the remedy should be efficacious.
The higher development of the machine process
makes competitive business impracticable, but it
carries a remedy for its own evils in that it makes
ition practicable. The ulterior effects of thor-

ighgoing monopoly, as regards the efficiency of
industry, the constancy of employment, the rates
of wages, the prices of goods to consumers, and
the like, are, of course, largely matter of surmise,
and cannot be taken up in thia inquiry, the present
purpose being merely to give in outline an eco-

imic theory of current business enterprise.

A further consideration bearing on the later

phases of the business situation may be added.

The great coalitions and the busine.'w manceuvres

connected with them have the effect of adding to the

fortunes of the greater business men ; whicli

carri

^kpDali

^OQgl

pui

|r;

264 THE THEORY OF BUSINESS ENTERPRISE

adds to the large incomes that cannot be spent in
consumptive expenditures ; which accelerates the
increase of investments ; which brings competition
if there is a chance for it; which tends to bring on
depression, in the manner already indicated. /The
great coalitions, therefore, seem to carry the seed
of this malady of competition, and this evil conse-
quence can accordmgly be avoided only on the
basis of 80 comprehensive and rigorous a coalition
of business concerns as shall wholly exclude com-
petition, even in the face of any conceivable amount
of new capital seeking investment

What has made chronic depression the normal
course of things iai modem industrial business is
the higher development of the machine process, —
given, of course, the traits of human nature as it
manifests itself in business traffic. The machine
process works this effect by virtue, cliiefly if not
altogether, of these two characteristics: (1) a
relatively rapid rate of increasing efficiency ; and
(2) the close interdependence of the several lines
of industrial activity in a comprehensive system,
which is growing more comprehensive and close-
knit as improvement and specialization of indus-
trial processes go on. The last-named factor counts
for more in proportion as the interdependence
grows closer and more comprehensive. Disturb-
ances are progressively transmitted with greater
facility and effect throughout the system, and fai.-li

HwM

THE THEOilY OF MODERN WELFAEE

te of industrial business comes to stand in relar
lively intimate relations to an ever increasing range
of other lines with which it carries on a traffic of
purchase or sale. A consequence of this state of
things is that any business coalition, in order effec-
tually to serve its purpose of maintaining earnings
and capitalization, is required to be of larger scope
ajid closer texture. As the exigencies which en-
force the resort to coalition uninterruptedly gain
in scope and urgency, the "trust" must take the
same course of growth to meet these exigencies ;
until, with some shght further advance along the
accustomed lines, the trust which shall serve the
modern business situation must comprehend in one
close business coalition virtually the whole field of
industry within which the machine process is the
dominant industrial factor/

To this there is a broad exception, given by the
circumstances of the industrial organization. This
organization rests on the distinction between busi-
ness management and ownership. The workmen
do not and cannot own or direct the industrial
equipment and processes, so long as ownership pre-
vails and industry is to be managed on business
principles. The labor supply, or the working pop-
ulation, can therefore not be included in the ideally

' It is, «,i7., already apparent Uiat the general railway BysMm of
America must presently come under ontt management, and it must
(all Into a coalition nitli tlie group of Industries that are occupied
with the supply and elaboralioii o[ iron, coal, and lumber.

266 THE THEORY OF BUSINESS ENTEKFRISE

complete business coalition suggested above, bow-
ever coD8iimmat€ the machine system and the
businesa organization built upon it may become.
/^ that when the last step in business coalition has
been taken, there remains the competitive friction
between the combined business capital and the
combined workmen./

From the considerations recited above it appears
that the competitive management of industry be-
comes incompatible with continued prosperity so
soon as the machine process lias been developed to
its fuller efficiency. Further technological advance
must act to heighten the impracticability of com-
petitive business. As it is sometimes expressed, the
tendency to consolidation is irresistible. Modem
circumstances do not permit the competitive man-
agement of property invested in industrial enter-
prise, much less its management in detail by the
individual owners. Iln short, the exercise of free
contract, and the other powers inhering in the
natural right of ownership, are incompatible with
the modern machine technology.^ Business discre-
tion necessarily centres in other hands than those
of the general body of owners, In the ideal case,
so far as the machine technology and its business
concomitants are consistently carried through, the
general body of owners are necessarily reduced to the
practical status of pensioners dependent on tiie dis- I

THE THEOEY OF MODERN WELFARE 267

Ibetion of the great holders of immaterial wealth ;
he general body of business men are similarly, in
the ideal outcome, disfranchised in point of busi-
ness initiative and reduced to a bureaucratic hier-
archy under the same guidance ; and the rest, the
populace, is very difficult to bring into the schedule
except as raw material of industry. What may
take place to accentuate or mitigate this tendency
is a question of the drift of sentiment on the mat-
ter of property rights, business obligations, and eco-
nomic policy. So far as the economic factors at play
in the modern situation shape this drift of sentiment
tliey do so in large part indirectly, through the dis-
ciplinary eflfect of new and imtried circumstances of
IK)liticB and legal relation to which their working
pves rise. /

CHAPTER VIII

BUSINESS PRINCIPLES IN LAW AND POLITICS

Popular welfare ia bound up with the conduct
of busmess ; because industry ia managed for busi-
ness ends, and also because there prevails through-
out modern comoiunities a settled habit of rating
the meana of Uvehhood and the amenities of life
in pecuniary terms. But apart from their effect
in controlling the terms of livelihood from day to
day, these principles are also in great measure
decisive in the larger aSairs of life, both for the
individual in his civil relations and for the com-
munity at large in its political concerns. Modem
(civilized) iuatitutions rest, in great part, on busi-
ness principles. This is the meaning, as appUed
to the modem situation, of the current phrases
about the Economic Interpretation of History, or
the Materialistic Theory of History.
■ Because of this settled habit of seeing all the-v
conjunctures of life from the business point of
view, in terms of profit and loss, the management
of the affairs of the commimity at large falls by
common consent into the hands of business men

I BUSINESS IN LAW AND POLITICS 269
is guided by business considerationa. Hence
uioJem politics is business politics, even apart
from the sinister application of tlie phrase to what
is invidiously called corrupt politics. This is true

Jboth of foreign and domestic policy. Legislation,
police surveillance, the administration of justice,
the military and diplomatic service, all are chiefly
concerned vfith business relations, pecuniary intei^
ests, and they have little more than an incidental
bearing on otlier liuman interests. All tliis appa-
ratus is also charged with the protection of life and
t personal liberty, but its work in this bearing baa
much of a pecuniary color.
Legislation and legal decisions are baaed on the
dogma of Natural Liberty, This is peculiarly true
as regards the English-speaking peoples, the foun-
dation of whose jurispiudence is the common law,
and it holds true in an especial degree of America.
In other European communities the sway of natural-
rights preconceptions is not so unmitigated, but
even with them there is a visibly growing predilec-
tion for the natural-rights standpoint in all matters
I touching business relations. The dogma of natural
lerty is peculiarly conducive to an expeditious
business traffic and peculiarly consonant with the
habits of thought which necessarily prevail in any
^^ business community.
^K The current body of natural-rights preconcep-

uou .
Ltoucl:
Hjibert

THE THEORY OF BUSINESS ENTERPRISE

tions antedates the modern business situation. The
scherae of natural rights grew up and found secure
lodgement in the common sense of the community,
as well aa with its lawgivers and courts, under the
discipline of the small industry and petty trade
(" domestic industry ") whose development cul-
minated in the eighteenth century.* In industrial
matters the efficient and autonomous factor in the
days of the small industry was the individual work-
man, his personal force, dexterity, and diligence;
similarly in the petty trade of the precapitalistic
English situation the decisive factor was the dis-
cretion and sagacity of the small merchant and the
petty employer, who stood in direct personal rela-
tions with their customers and their employees. In
so far as trade and industry was not restrained by
conventional regulations, statutory or customary,
both trade and industry was in effect an open field
of free competition, in which man met man on a
somewhat equable footing. While the competitors
were not on a footing of material equality, the
industrial system was sufficiently loose-jointed, of
a sufficiently diffuse growth, to make competition
effective in the absence of mandatory restrictiona.
The like wiU hold of the business organization
associated with the small industry. Both trade
and industry were matters of personal efficiency

1 Cf. Aahley, Economic JUitory and Thtory, bk. II., eapecUllj

1«
:

I BUSINESS IN LAW ANI> t-OLITK-S '^71

»ther than comprehensively organized processes of
""an impersonal character.'

Natural rights, as they found their way into the
conceptions of law and equity, were in effect the
t assumed equal rights of men so situated on a plane
i of at least constructive equality that the indi-
viduals concerned would be left in a position of
effectively free choice if conventional restrictions

(were done away. The organization was not, me-
chanically, a close-knit one, in the sense that the
ooncatenation of industrial processes or of business
transactions was not rigorous either in point of
time relations or of the quantity and character of
the output or the work. Neither were the place,
pace, circumst-ances, means, or hours of work closely
I determined for the workman or his employer by

I mechanical circumstances of the industrial process
or of the market. The standardization of life under
the old r^ime was of a conventional character, not
of a mechanical kind such as is visible in the more
recent development. And tliis conventional stand-
ardization was gradually losing force.
The movement of opinion on natural-rights
ground converged to an insistence on the system
of natural liberty, so railed. But this insistence
on natural liberty did not contemplate the abroga-
tion of all conventional prescription. " The simple
obvious system of natural liberty " meant
' See Clupter IV. above.

272 THK THEORY UF HL'SINESS ENTEttl'KlSE

freedom from restraint on any other prescriptive
ground than that afforded by the rights of owner-
ship. In its economic bearing the system of
natural liberty meant a system of free pecuniary
/contract. '* Liberty does not mean license ; "
/ which in economic terms would be transcribed,
(^J^he natural freedom of the individual must not
traverse the prescriptive rights of property."
Property rights being included among natural
rights, they had the indefeasibility which attaches
to natural rights. Natural liberty prescribes free-
dom to buy and sell, limited only by the equal
freedom of others to buy and sell ; with the
obvious corollary that there must be no interfer-
ence with others' buying and selling, except by
means of buying and selling.

This principle of natural (pecuniary) liberty has
found its most unmitigated acceptance in America,
and has here taken the firmest hold on the legal
mind. Nowhere else has tlie aacredness of pecun-
iary obligations so permeated the common sense of
the community, and nowhere does pecuniary obli-
gation come so near being the only form of obli-
gation that has the unqualified sanction of current
common sense. Here, as nowhere else, do obliga-
tions and claims of the most diverse kinds, domestic,
social, and civil, tend to take the pecuniary form
and admit of being fully discharged on a mone-
tary valuation. To a greater extent than else-

BUSIMESS IN LAW AND POLITICS

where public esteem is awarded to artists, acton^
preachers, writers, scientists, officials, in some
rough proportion to the sums paid for their work.
American civil rights have taken an extreme
. form, with relatively great stress on the inviola-
I bility of pecuniary relations, due to the peculiar
circumstances imder which the American commu-
nity has grown up./ The pioneers, especially in
that North-Atlantic seaboard community that has
I been chiefly effective in shaping American tradi-
» tions, brought with them a somewhat high-wrought
variant of the English preconception in favor of
individual discretion, and this tradition they put
in practice under circumstances jieculiarly favorable
to a bold development. They brought little of the
remnants of that prescriptive code that once bound
the handicraft system, and the conditions of life in
the colonies did not foster a new growth of conven-
tional regulations circumscribing private initiative.
America is the native habitat of the self-made man,
and the self-made man is a pecuniary organism.'
U Presently, when occasion arose, the metaphysics
f of natural liberty, pecuniary and other, was em-
bodied in set form in constitutional enactments.
It is therefore involved in a more authentic form
1 with more incisive force in the legal structure
thia community than in that of any other.

Ct, a,g., Ashley, "The Economic AtmoHphere of Ameiici," In
Si»0Tic and Etummie, pp. 406 e( acq.

274 THIC THKORY IW BUSINESS ENTERPRISE

-7" Freedom of contract is the fundamental tenet of
, the legal creed, so to speak, inviolable and inaUen-
able ; and within the province of law and equity no
one has competence to penetrate behind this first
premise or to question the merits of the natiu^l-
rights metaphysics on which it rests. The only
principle (attested habit of thought) which may
contest ita pnmacy in civil matters is a vague
" general welfare " clause ; and even this can effec-
tively contest its claims only under exceptional
circumstances. Under the application of any
general welfare clause the presumption is and
always must be that the principle of free contract
be left intact so far as the circumstances of the
case permit. The citizen may not be deprived of
life, liberty, or property without due process of
law, and the due process proceeds on the premise
that property rights are inviolable. In its bearing
upon the economic relations between individuals
this comes to mean, in effect, not only that one
individual or group of individuals may not legally
bring any other than pecuniary pressure to bear
upon another individual or group, but also that
pecuniary pressure cannot be barred.

Now, through gradual change of the economic
situation, this conventional principle of unmiti-
gated and inalienable freedom of contract began
to grow obsolete from about the time when it was
fairly installed ; obsolescent, of course, not in point

BaSENESS IN LAW AND TOMTICS

^Bo( [aw, but in point of fact. Since about the time
^B>rhen thia new conventional standardization of the
^K scheme of economic life in terms of free contract
^f teached its mature development, in the eighteenth
century,' a new standardizing force, that of the
machine process, has invaded the field.' The
standardization and the constraint of the system
of machine industry differs from what went before
it in that it has had no conventional recognition,
no metaphysical authentication. It has not become
a legal fact. Therefore it neither need nor can be
taken account of by the legal mind. It is a new
fact which fits into the framework neither of the
ancient system of prescriptive usage nor of the
later system of free personal initiative. It does not
exist dejure, but only de facto. Belonging neither

I to the defunct system nor to the current legal
system, since it neither constitutes nor traverses a
t This dal« is Irue tor EDgl&nd. For America the dlacipllne tavor-
Itble to the growth of the natural -Uberty dogma lasted nearly a century
longer. !□ America the new, mudem, technological and businesB era
Gwt scarcely be said to have set in in good vigor until the period ol the
Civil War, Hence, with a longer and lAt«r training, the preconcep.
Uoiu ol nataral liberty are fresher and more tenacious in America.
For the Continental peoples the case lb dlBerent again. With them
the modem teclmological and buainess xlluation is of approximately
the same date as in America, bnt their training up to the date ol the
UuuUtion to the modem situation was In a much lees degree a training
In individual initiative, free scattered industry, and petty trade. The
Continental peoples for the moat part made a aomenhnt abrupt tran-
sition after the middle o( llie nineteenth century from a stale and
dilapidated system of guild and fcudalistic preBcripllons to the (tor
tbem) exotic system of modem technology and bualneas principles
Soe ChapUr II. above and Chapter IX. below.

^_ uemj exotic
^^L *SMCha

276 THE THEORY OF BUSINESS ENTERPRISE

"natural right," it is, as within the cognizance of
the law, non-existent. It is, perhaps, actual, with
a gross, material actuality ; but it is not real, with
a legal, metaphysically competent reality. Such
coercion as it may exert, or as may be exercised
through its means, therefore, is, in point of legal
reality, no coercion.

Where physical impossibility to fulfil the terms
of a contract arises out of the concatenation of
industrial processes, this physical impossibility
may be pleaded as invalidating the terms of the
contract. But the pecimiary pressiu-e of price or
subsistence which the sequence and interdepen-
dence of industrial processes may bring to bear has
no standing as such in law or equity ; it can reach
the cognizance of the law only indirectly, through
gross defection of one of the contracting parties, in
tliose cases where the pressure is severe enough to
result in insolvency, sickness, or death. The
material necessities of a group of workmen or
consumers, enforced by the specialization and con-
catenation of industrial processes, is, therefore, not
competent to set aside, or indeed to qualify, the
natural freedom of the owners of these processes
to let work go on or not, as the outlook for profits
may decide. Profits is a business proposition, live-
lihood is not.'

' Under the system of bandJcnitt Mid petty trade the oonTerw <ru

true. Livelihood n&s the lundii mental norm of buaioeBB TepilAtiODB ,*
profit* bad but a secnndarj atainlirig, if any.

•'BUSINESS IN LAW AND POLITICS 277

^H Under the current de fcLcto standardization of
economic life enforced by the machine industry,
it may frequently happen that an individual or a
group, €.g., of workmen, has not a de facto power
^ft of free contract. A given workman's livelihood
^P can perhaps, practically, be found only on accept-
ance of one specific contract offered, perhaps not
at all. But the coercion which in this way bears
upon hifl choice through the standardization of
industrial procedure is neither assault and battery
nor breach of contract, and it ia, therefore, not
repugnant to the principles of natural liberty.
Through controlling the processes of industry in
which alone, practically, given workmen can find
their livelihood, the owners of these processes may
bring pecuniary pressure to bear upon the choice
^H of the workmen ; but since the rights of prop-
yl erty which enforce such pressure are not repug-
^B nant to the principles of natural liberty, neither
^H is such pecuniary pressure repugnant to the law, —
^* the case is therefore outside the scojw of the law.
The converse case, where the workmen take
similar advantage of their employers to bring

»lliem to terms, is similarly outside the scope of
the common law, — supposing, of course, that
there has in neither case been a surrender of
individual liberty, a breach of contract, theft, a
^^ resort to violence, or threats of violence. So long
^Ku there ia no overt attempt on life, liberty of tlic

278 THE THEORY OF BUSINESS ENTERPRISE

person, or the liberty to buy and sell, the law can-
not intervene, unless it be in a precautionary way
to prevent prospective violation of personal or
property rights,

The " natural," conventional freedom of contract
is sacred find inalienable. De faclo freedom of
choice is a matter about which the law and the
courts are not competent to inquire. By force of
the concatenation of industrial processes and the
dependence of men's comfort or subsistence upon
the orderly working of these processes, the exercise
of the rights of ownership in the interests of busi-
ness may traverse the rfe faclo necessities of a
group or class ; it may even traverse the needs of
the community at large, as, e.g., in the conceiv-
able case of an advisedly instituted coal famine ;
but since these necessities, of comfort or of liveli-
hood, cannot be formulated in terms of the natural
freedom of contract, they can, in the nature of the
case, give rise to no cognizable grievance and 6nd
no legal remedy.

The discrepancy between l^w -and fact in the
matter of industrial freedom has had repeated
illustration in the court decisions on disputes
between bodies of workmen and their employers or
owners. These decisions commonly fall out in
favor of the employers or owners ; that is to say,
they go to uphold property rights and the rights of
free contract. Tlie courts have been somewhat

BUSINESS IN LAW AND POLITICS 279

d\y taken to task by a certain class of ob-
iaervera for alleged jjai-tiality to the owners' side in
I this class of litigation. It has also been pointed
I out by faultfinders that the higher coiuia decide,
Ion the whole, more uniformly in favor of the
^employerKjwner than the lower ones, and especially
more so than the juries in those cases where juries
have found occasion to pass on the law of the case.
The like is true as regards siuts for damages aris-
»ing out of injuries sustained by workmen, and eo
■ involving the question of the employer's liability.
Kven a casual scrutiny of the decisions, however,
will show that in most cases the decision of the
court, whether on the merits of the case or on the
constitutionality of the legal provisions involved,'
is well grounded on the metaphysical basis of
natural liberty. That is to say in other words, the
decisions will be found on the side of the main-
tenance of fundamental law and order, "law
and order " having, of course, reference to the
inalienable rights of ownership and contract. As
should fairly be expected, the higher courts, who
are presumably in more intimate touch with the
principles of jurisprudence, being more arduously
trained and more thoroughly grounded in the law
at the same time that they have also presumably a
larger endowment of legal acumen, — these higher

' S.g.. as to employer's liabilily for accidents or unsanitary preni-
i«M, the nafeguanling oE roacUlnery, itge limit of laboren or hour limit,
ul wurkiug time, etc.

280 THE THEORY OF BUSINESS ENTEEPBISE

courts speak more unequivocally for the meta-
physical principles and apply them with a surer
and firmer touch. ^In the view of these hi^er
I adepts of the law, free contract is so inalienable a
natural right of man that not even a statutory
enactment will enable a workman to forego its
'exercise and its responsibility. 1 By metaphysical
\ necessity its exercise attaches to the individual bo
Widefeasibly that it cannot constitutionally be dele-
gated to collective action, whether legislative or
corporate.^ This extreme consequence of the
principle of natural liberty has at times aroused
indignation in the vulgar ; but their grasp of legal
principles is at fault. The more closely the logi-
cal sequence is followed up, the more convinc-
ingly does the legitimacy of such a decision stand
out.

> E.g. where a workmaD's accepting emplojrnieiit on machinerj
which is not Bftleguarded aa the l&w requires is construed aa an exer-
cise of the indefeasible right of free contract on bia part, which thereby
exemplB the employer from liability for eventual accidents.

In point of legal principle the relucUnce to allow or recc^iie
limited liabilit; in joint stock companies, in the English practice prior
to the Companies Acts, was of much the same nattire aa the current
reluctance to allow an stienation or abridgmeot of a workman's indi-
vidual responsibility for the terms of bis employment and the conse-
quences following from it. It was lett that a pecuniary liability was
a personal matter, of which the person was not competent to dlveet
himself under that system of matual rights and duties in which the
members of the couimimity were bound together. Impersonal, eol-
lectire, and limited liability won Its way, as against the system of
natural liberty, in this field by sheer force of business expediency.
In a conflict of principles between the main proposition and one of
its oorollariea, the corollary won become the facts had outgrown tLe
primary implicalion of the malii propoaition.

BUSINESS IN LAW AND POLITICS 281

I In comparing the decisions of the higher courts
th those of the lower they contrast most signally
with the decisions rendered by juries in the lower
tribunals. While this contrast has a significance
in another connection, it casts no shadow on the
legality of the decisions of tlie courts of higher
instance. The jurie.'!, in great measure, speak for
the untrained sympathies of the vulgar, which are
a matter somewhat apart from the foundations of
law and order.'

' The common law la of eourae a formulation of the deliverancM
of cominoD sense on the points which it touchui. But common law,
U well as common Bsnae, being a, formulation of habita of thought,
is necessahl; an outgrowth of paet rattier than of present circom-
Manees, — in this case the clrcumstanceti of the eighteenth century, —
wbeteas the sympathies of the vulgar, as they appear in jury decttions,
are largely the outcome of those modem experiences that are at io-
creujng variance with the foundations of the common law.

It may be remarked by the way that, while the charge ot partiality
or corruption, ofun heard as against the«e higher tribunals, may in
B tew scattering instances be founded, that is after all not much to
the point as regards practical conseqaencBH. The greater number
of the courts, indeed virtually the entire judiciary, are no doubt above
substantial suspicion in the premises. And after all, if they were
not incorruptible, — if the common run of the tribunals were cor-
ruptly working in the interest of the employers or owners, — that need
not seriously affect the outcome as regards the general tenor of th»
decisoDS handed down. If they are corrtipt or biaaaed, tliey will de-
cide in favor of the ownei^, who can afford to pay, and Uiey will be
nnder the necessity o( finding plausible reasons in law for so doing.
Sach reason can be found only In the luetaphyaical natural Tight«
basis ot the law ; and if it can be found by the help of such legal
ntlocination, then it is a valid ground ot decision, that being Uie
pecnliar merit of metaphysical grounds ot decision. On the other
hand, if the court is a " learned, upright judge," he will look for tho
grounds of decision in the same place and And them In the same
shape. Neoeaaarily so, since the point in dispnte is almost Invariably %
qiieMlon of the legal righla of property as Bgainst the material requii«-

282 THE THEOKY OF BUSINESS ENTEEPBXSE

Popular sentiment, then, does not at all uni*
formly bear out these decisions of the courts in
disputes between property rights and naked man-
kind, especially not in the more rigorous enforce-
ment of the principle of free contract. This
discrepancy serves to show that the vulgar, the
laity, from whose numbers the juries are drawn,
have not an adequate sense of the principles that
lie at the root of the law ; which may be due in
part to their not realizing how essential a fomida-
tion of law, order, and common welfare these prin-
ciples of natural liberty are. The visible disparity
in the distribution of property may make those
classes who have little property envious of the
wealthy members, and so make them lose interest
in the maintenance of the rights of property.
But apart from this, the discipline of daily life,

ments of comfort or of liveUhood ; and the rights of property Kre die
foundatioa of modern law and order, while the requireroentB of com-
fort or livelihood passed out of the scope of the law on the abroga-
tion of the outworn Hysteni of mandatory preecriptiooa goTeming
iodustrial and trade relationa in early modem tiinea. Since the dis-
putes in question rarely if ever arise out of a. breach of contract on
the part of the emptuyer-owner, the decision can ordinarily, in the
jiaiare ol the case, not go against him, inasmuch as the fotindatioii
of economic law and order to the freedom and Inviolability of pecun-
iary contracts. It should, In fact, be nearly a matter of indiSerence
to the '-popular" side of iLls class of litigation whether the court*
are corrupt or not. The quefitirm has little else than a specnlaUv*
InteresL In the nature of the case the owner atone has, ordioarilf .
any standing in court. All of which argues that there are probably
very few oourts that are in any degree corrupt or biassed, so far as
touches litigation of tbi« class. Rflorta to corrupt them would b«
a work of supererogation, besides being Iramonl.

(rom whi(^ the common-eense mtkins f^ the
vulgar are in good part derived, b no longer in
full accord witii the natural-rights coDCeptions
handed down from the eighteenth century. In
other words, the conceptions of natural r^hts on
which the common law rests embody a technically
competent formulation of the deliverances of that
body of common sense which was inculcated by
the discipline of everyday life in the eighteenth
century, before the advent of the current situa-
tion ; whereas the discipline of everyday life imder Y
the current technological and business situation
inculcates a body of common-sense views some-
what at variance with the received natural-rights
notions.

There is apparently something of a divergence
between the received notions on this head and (he
deliverances of latter-day common sense. The
divergence is neither well defined nor consistent.
The latter-day attitude toward questions of the
kind involved is vague, chiefly negative or critical,
and apparently fluctuating ; but after all there is
a somewhat persistent divergence, which may even
be said to have a systematic character, so far as
it goes. It runs in the direction of a (partial and
vacillating) disavowal or distrust of the meta-
physics of free contract, and even of natural Ub-
erty generally. This uucertaiiity of allegiance to

} received foundations of law and order prevails

284 THE THEORY OF BUSINESS ENTERPRISE

in unequal degrees among the varioue classes of
the community, being apparently largest and most
outspoken among the workmen of the industrial
towns, and being, on the whole, less noticeable
among the propertied and professional classes and
the rural population. The peculiar class dis-
tribution of this disintegration of received convic-
tions, as well as its connection with modem
industrial conditions, will be taken up again pres-
ently in another connection.

The state, that is to say, the government, was
once an organization for the control of affairs in
the interest of princely or dynastic ends. In
internal affairs statecraft was occupied with ques-
tions of the dynastic succession, the endeavors and
intrigues of the political magnates, fiscal adminis-
tration directed to finding adequate support for the
princely power, and the like. In external polities
the objective end was dynastic prestige and security,
military success, and the like. Such is still in
part the end of political endeavor in those coun-
tries, as, e.g., Germany, Austria, or Italy, where the
transition to a constitutional government has not
been completed. But since the advent of constitu-
tional government and parliamentary representa-
tion, business ends have taken the lead of
dynastic ends in statecraft, very much in the
same measure as the transition to constitutional

BUSINESS IN LAW AND POLITICS

285

^Hsethods has been effectually carried through. A^.
oonatltutional government is a business govern- \
ment. It is particiJarly through tlie buainess
expedient of parliamentary voting on the budget
that any constitutional executive, e.g., is kept
vrithin constitutional bounds ; and the budget is
voted with a main view to its expediency for busi-
ness ends. The expediency of buainess enterprise
is not questioned, whereas the expediency of an
increase of princely power and dignity, with the
inddental costs, may be questioned.
H^ Modem governmental policies, looking as they
^pio to the furthering of business interests as their
chief care, are of a " mercantile " complexion. They
aim to foster trade, as did the mercantile policies of
the sixteenth and seventeenth centuries, although
smce " trade " has come to include much else than
foreign commerce, the modem policies look to busi-
ness in the more comprehensive sense which the term
sessarily has. But these modem mercan-
tile policies, with their tariffs, treaties, interstate
commerce regulations, and maxims prohibiting all
"restraint of trade," are after all not of the same

K nature as the mercantile policies of the old French
and German statesmen, which they superficially
resemble. The old " mercantile system," as it
prevailed on the Continent of Europe, was conceived
in the interest of the prince, the furthering of com-
■cial advantage being a mean.s to princely power

286 THE THEOKY OF BUSINESS ENTERPRISE

and dignity.' The modern mercantilism under con-
stitutional rule, on the other hand, looks to the
prince or to the government as a means to the end
of commercial gain. With the transition to con-^ u
stitutional rule and methods, the discretion and
autonomy in the case has passed from the hands of
the prince into those of the business men, and the
interests of the husiness men have superseded
those of the crown.

Representative government means, chiefly, repre-
sentation of business interests. The government
commonly works in the interest of the business men
with a fairly consistent singleness of purpose. And
in its solicitude for the business men's interests it
is borne out by current public sentiment, for there
is a naive, imquestioning persuasion abroad among
the body of the people to the effect that, in some
occult way, the material interests of the populace
coincide with the pecuniary interests of those busi-
ness men who live within the scope of the same set
of governmental contrivances. This persuasion is
an article of popular metaphysics, in that it rests
on an uncritically assumed solidaiity of interests,
rather than on an insight into the relation of busi-

' This is not true in nearly the ssme degree for the mercantile poli-
cies of England, area in early modem times. In English policy, under
the inchoate coaslttuUonal aystom cif llie meruantiiisl era, the ulterior
(avowed) end is always the (business) advantage of the "cominon-
wealth." The prince comes In rather u second tlkan aa lint elaJmaot
on the solicitude ot tlie mercantiliat s

BUSINESS m LAW AND POLITICS 287

^BlBss enterprise to the material welfare of thoae
classes who are not primarily business men. This
persuasion is particularly secure among the more
conservative portion of the community, the business
men, superior and subordinate, together with the
professional classes, as contrasted with those vulgar
portions of the community who are tainted with^
socialistic or anarchistic notions. But since the
conservative element comprises the citizens of sub-
stance and weight, and indeed the effective majoi^
ity of law-abiding citizens, it follows that, with the
sanction of the great, body of the people, even in-
cluding those who have no pecuniary interests to
serve in the matter, couatitutional government has,
in the main, become a department of the business

, organization and is guided by tlie advice of the
men. The government has, of course,
much else to do besides administering the general
affairs of the business community ; but in most of
its work, even in what is not ostensibly directed to

f business ends, it is under the surveillance of the

isiness interests. It seldom happens, if at all, that

he government of a civilized nation will persist

a course of action detrimental or not osten-

Imbly subservient to the interests of the more
conspicuous body of the community's business men.
The degree in which a goveniment fails to adapt
its policy to these business exigencies is the
measure of its senility.

288 THE THEORY OF BUSINESS ENTERPRISE

The ground of eentiment on which resta the
popular approval of a government for husineas ends
may be summed up under two heads : patriotiam
and property. Both of these terms stand for in-
atitutional facts that have come down out of a past
which differed substantially from the present situ-
ation. The substance of both is of the nature of
unreasoning sentiment, in the sense that both are
insisted on as a matter of course, as self-legitimat-
ing grounds of action which, it is felt, not only
give expedient rules of conduct, but admit of no
question as to their ulterior consequences or their
r value for the life-purposes of the community. The
, former of these fundamental institutional habits
of thought (perhaps better, habits of mind) runs
back to the discipline of early barbarism, through
the feudal days of fealty to the earlier days of clan
Kfe and clannish animosity. It has therefore the
deep-rooted strength given by an extremely pro-
tracted discipline of predation and servitude. Under
modem conditions it is to be rated as essentially
an institutional survival, so ingrained in the pop-
ulace as to make any appeal to it secure of a re-
sponse irrespective of the material merits of the
contention in whose behalf the appeal ia made.'

■ Tbe line of deaoeut of the preconception of patrialiani or ctiui-
viniam, as it Unda expression In tbia lively aeiue of pecaniarf soli-
darity, may be ouLllned as follone ; Under the clan (gentile or tribal)
ajBtem oat of which tbe West-European peoples passed into tbe r£ginia
of feudal Cbristendom, a giveu gioup stood together ia « union of

BUSINESS IN LAW AND POLITICS

1^ Bj force of this happy knack o£ clannish fancy
fiUie common man is enabled to feel that he has
aome sort of metaphysical share in the gains which
accrue to the business men who are citizens of the
iSame " commonwealth " ; so that whatever policy
furthers the commercial gains of those business
men whose domicile is within the national boun-
daries is felt to be beneficial to all the reat of the
popiilation.'

oBence uid detence, warlike and economic, on the basis of a putative
lilood relatloiubip. When the manor or the (esaeatlall; servile) mark
came to replace the clan group a« the economic and civil unit, the bond
of putative blood rektionahip persisted in a. slightl; modided form and
force, the Incidence of the sense of solidarity, the " conscioasness of
kind," then Hhiftlng to the new group unit, with allegiance centring
on the feudal head of the group, instead of, as formerly, on the senior
line of putative descent. Wheu the state came forward in mediieval
kod early modem times and took over tbe powers and prerogatives of
the bead of the manor or the feudal lord, it took over also the incidence
of this sense of allegiance, and the sense of solidarity came to cover
tbe larger group of tbe nation wliicli bad succeeded b> the autonomy
of the manor. Where tbe Hue of iuatitutional descent runs through
Iha industrla] town, with guild, handicraft, and local government, the
transient features of the growth are supertlcially diCIerent but in effect
mticb the same. Tbe discipline of warfare, which kept up the practice
of joint action and bad the appearance of joiut enterprise, served to
keep Ibe sense of patriotic solidarily firm and vigorous and enabled It to
cover olber interests as well as the princely enterprise of warfare and
Blate-maklng. Wherever unbroken peace prevailed for an appreciable
period, so as to affect the growth of traditions, tbe sense of national
■olidarlty showed symptoms of Blackening. For piirposeB of economic
■oUdarlty the commonwealth U conceived after tbe manner of an over'
(nmn manor. It llgnresas such, e.g., in English mercantilist writings
f the sixteenth to the eighteenth century, as well as In the patriotic
« politics of the present.

1 In passing it may be remarked that the fact of this sense of soli*
irl^ being an s^achronism must not be taken as Implying anything
IT 01 against the substantial merits of such a frame of mind.

290 THE THEORY OF BUSINESS ENTERPRIJ^E

The second institutional support of busiiiess poli- '
tics, viz. property, is similarly an outgrowth of the
discipline of the past, and similarly, though per-
baps ill a leas degree, out of touch with the disci-
pline of the more recent cultural situation. In the
form in which it prevails in the current popular
animus, the principle of ownership comes down
from the days of handicraft industry and pettj-
trade, as pointed out above. As it is of less ancient
and less unbroken descent, so it seems also to be
a less secure cultural heritage than the sense of
patriotic solidarity. It says that the ownership of
property is the material foundation of human well-
being, and that this natural right of ownership is
sacred, after the manner in which individual life,
and more especially national life, is sacred. The
habits of life and thought inculcated by joint work
under the manorial system and by joint rules under
the handicraft system have apparently contributed
much to the notion of a solidarity of economic in-
terests, having given the notion such a degree of
consistency as has enabled it to persist in the face
of a visible discrepancy of interests in later, capital-
istic times. Under this current, business regime,
business gains are the basis of individual wealth,
and the (pseudo) notion of joint acquisition ha?
taken the place of the manorial notion of joint
work. The institutional animus of ownership, as
it took shape under the discipline of early modem

BUSINESS IN LAW AND POLITICS

291

Iitandicraft, awards the ownership of property to
the workman who has produced it. By a dialectical
conversion of the terms, this metaphysical dictum
is made to fit the circumstances of later competitive
business by construing acquisition of property to
mean production of wealth ; su that a business man
is looked upon as the putative producer of whatever
wealth he acquires. By force of this sophistication
the acquisition of property by any person is held

Rto be, not only expedient for the owner, but meri-
torious as an action serving the common good.
Failure to bargain shrewdly or to accumulate more
goods than one has produced by the work of one's

I own hands ia looked upon with a feeling of annoy-
ance, as a neglect, not only of opportunity, but of
duty. The pecuniary conscience commonly does
Hot, of coui-se, go to quixotic lengths in a public-
spirited insistence on everybody's acquiring more
than an aliquot part of the aggregate wealth on
hand, but it is felt that he best serves the common
good who, other things equal, diverts the larger
share of the aggregate wealth to his own possession.
His acquiring a defensible title to it makes him the
putative producer of it.

The natural-rights basis of ownership is by this
paralogism preserved intact, and the common man
I enabled to feel that the business men in the
I community add to the aggregate wealth at least
nuch as they acquire a title to ; and the sue-

292 THE THEORY OF BUSINESS ENTEEP^S^ ,

cessfiil business men are at least as well persuaded
that such is their relation to the aggregate wealth
and to the material well-being of the community
at large. So that both the business men whose
gains are sought to be enhanced by business poli-
tics and the populace by whose means the busi-
ness gains are secured work together in good faith
towards a well-advised business end, — the accu-
mulation of wealth in the hands of those men who
are skilled in pecuniary matters.'

The manner in which business interests work
out in government policy may be shown by follow-
ing up their bearing upon one phase of this policy.
An extreme expression of business politics, and at
the same time a characteristic trait of the higher
levels of national life in Christendom, is the cur-
rent policy of war and armaments. Modem busi-
ness is competitive, emulative, and the direction
of business enterprise is in the hands of men who
are single-minded in their competitive conduct of

'The two complemeDtaiy eentimenta — patriotlam and pecimiu?
solidarity — are found in unequal meaaute among the several nations
o( ChriBtendom. The diaparity ia this respect correspondB roughly with
adiaparity in past national esperience. The Conlineuial peoples, e.g.,
have, on the whole, a readier and fuller, more uaequlvocal, patriotic
conviction, as tbey have also had a longer, more severe, and later dia-
cipiine lu the fealty that goes with a system of dynastic warfat« and
graded servitude ; whereas the English -speaking peoples are animated
with a more secure conviction that money value is the chief end of
serious endeavor and that business solvency is the final attribute ol
manhood. But in either case the outcome is the primacy of businee*
In Uie counsels ol natioua, and its empire is none the less secure for its
resting man en one or tho oUici of these two supports.

They neither are mclined, nor will busi-
ness competition permit them, to neglect or ovei>
look any expedient that may further their own
advantage or hinder the advantage of their rivals.
Under the modern situation, as it has taken shape
since the industrial revolution,' business competi-
tion has become international, covering the range
of what is called the world market. In this inter-
national competition the machinery and policy of
the state are in a peculiar degree drawn into the
service of the larger business interests; so that,
both in commerce and industrial enterprise, the
business men of one nation are pitted against those
of another and swing the forces of the state, legis-
lative, diplomatic, and military, against one an-
other in the strategic game of pecuniary advantage.
Kie business interests domiciled within the scope
of a given government fall into a loose organizar
tion in the form of what might be called a tacit
ring or syndicate, proceeding on a general xmder-
standing that they will stand together as against
outside business interests. The nearest approach
to an explicit plan and organization of such a
business ring is the modern political party, with its
platform, tacit and avowed. Parties differ in their
detail aims, but those parties that have more than

I For England the \mI ball of Ibe eighteenth century, for CoDti-
DenUl Eurape and America the litst half of the nineteenth. In cola-
txiti commerce the dute for both England and the Continent in mncti

^B juu commerc

294 THE THEORY OF BUSINESS ENTEKPKISE

a transient existence and superficial effect stand
for different lines of business policy, agreeing all
the wJiile in ao far that they all aim to further
what they each claim to be the best, largest, most
enduring business interests of the community.
The ring' of business interests which secures the
broadest approval from popular sentiment is, under
I constitutional methods, put in charge of the gov-
I emment establishment. This popular approval
I may be secured ou the ground of a sound business
' platform or (in part) on some ground extraneous
to business policy proper, such as a wave of nar
tional animosity, a popular candidate, a large
grain crop, etc. But the only secure basis of an
enduring party tenure of the government machin-
ery is a business policy which falls in with the
interests or the prejudices of the effective majority.
In international competition the ultima ratio b,
as ever, warlike force, whether the issue be between
princes of the grace of God or princes of ownership.
It is a favorite maxim of modern politics that
trade follows the flag. This is the business man's
valuation of national policy and of the ends of
national life. So stated, the maxim probably in-
verts the sequence of facts, but it is none the l&ss
a fair expression of the close relation there is be-
tween business endeavor and the modern military

' " Ring" ia here used ua a design&t[on of Ihis loose ni^nizntSoii
' le o[ policy, milliaiil Implying eriii-

BUSINESS IN LAW AND POLITICS

policies. Diplomacy, if it is to be effective for
, whatever end, must be backed by a show of force
ind of a readiness to use it. The definitive argu-
ment of those who speak for armaments (in Eng-
land and America) is that the maintenance of
business interests requires the backing of arms.
On the Continent of Europe this argument com-
monly comes second, while patriotic fancy and
animosity take the first place.

Armaments serve trade not only in the making
; general terms of purchase and sale between the
business men of civilized countries, but they are
similarly useful in extending and maintaining
business enterprise and privileges in the outlying
{ions of the earth. The advanced nations of
liristendom are proselyters, and there are certain
valuable perquisites that come to the business men
of those proselyting nations who advance the fron-
tiers of the pecuniary culture among the backward
populations. There is commonly a handsome mar-
^n of profit in doing business with these, pecuniar
ily unregenerate, populatlonw, particularly when
lie traffic is adequately backed with force. But,
also commonly, these peoples do not enter willingly
into lasting business relations with civilized mankind.
It is therefore necessary, for the purposes of trade
and culture, that they be firmly held up to such civil-
ized rules of conduct as will make trade easy and
^Docrative. To this end armament is indispensable.

_ wba
knd

fmen

anil

»^
of,

busi

sim

_ bu8m<

THE THEOKT OF BUSINESS ENTERPKISE

But in the portioning out of the trade perquisites
that fall to the proselyters any business community
is in danger of being overreached by alien ci\Tliz-
ing powers. No recourse but force is finally avail-
able in disputes of this kind, in which the aim of
the disputauta is to take advantage of one another
as far as they can, A warlike front is therefore
necessary, and armaments and warlike demonstra-
tions have come to be a part of the regidar appara-
tus of business, so far as business is concerned with
the world market.

In 80 far as it is guided by the exigencies of
trade, the objective end of warlike endeavor is the
peace and security necessar)' to an orderly develop-
ment of business. International business relations,
it is well said, make for peace ; in the sense, of
course, that they enforce the pacification of recalci-
trant barbarians and lead to contention between
civilized nations for a revision of the peace terms.
When a modem government goes to war tor trade
purposes, it does so with a view to reestablishing
peace on terms more lucrative to its business men.'

■ ArmameiitB and large militac; and naval establish men U have &lflo
a secondary attraction, o( a more intimate kind, for enierpriBing boai-
neaa men, in that they afford opportunitieH for tranaactions of a pecol-
iatl; lucrative character. Oue uf the parties (tlie govemineitt offlciftl)
concerned in such transactions has less than the ubuo] InDsntira to
drive a close bargain. His own private gain and loss is Dot immedi-
aulj inTolved, so Uiat he is less given to petty huckstering and clOM
surveillance of the execution of the contracla made. What addi toiea
to this conaideratiu[i Is the fact that military and naval eslabUshmeDla
babttually are what the vulgitr vtould call corrupt. The peeuDluy

L BUSINESS IN LAW AND POLITICS 297
above inquiiy into the nature and caufles of
the wars of nations lias resulted in little else than
a recital of commonplacea ; the facts and their
connection are matters of common notoriety, and
probably no one would hazard a question of the
alight and obvious inferences drawn in the course
of the recital. The excuse for this discursive
review of the motives and aims of a war policy is
that it gives a basis for an outlook on the present
and immediate future of business enterprise."

The experience of Continental Europe in the
matter of armaments during the last half-century,
and of all the greater nations during the last
two decades, argues that when warlike emulation
between states of somewhat comparable force has
once got under way it assumes a cumulative
character ; so that a scale of expenditure for arma-
ments which would at the outset have seemed

iiiMrwt of the offici&ls does not coincide with that ol the esiAbUshnient
TlMieliMi appreciable "margin of error" which a lagacioua buHiueM
nukn mny turn to account

The great biuiaeas interests are the more inclined to look kiadty
on an exteoBlon of warlike enterprise and armainenttt. since the pecun-
liiy sdnmtagM inore to them, while the pecuniary burden falls chiefly
on the reot ol the community. It is, to say the least, highly improb-
able tbat the busjneas gains which accrue from a well-conducCei] foreign
policy A^r, in modem limes, equal the cost at which they are secured ;
but that consideration scarcely enters, since the eostf are not paid out
of buslnees gains, but out of the industry of the rest of the people.
The people, however, are animated with an uncritical peisuasion that
ihey have some sort ol a residuary share in these gains, and Uiat this
residnaiy ahare in some manner ezceeda the wbols of the salna
Meorad.

1 See Chapter X. above.

298 THE THEORY OF BUSINESS ENTEBPBISE

absurdly impossible comes presently to be accepted
as a matter of course. Hitherto the cumulative
augmentation of war expenditures and of war
animus shows no sign of slackening. One after
another, the states that have offered some show of
peaceable inclinations have been drawn into the
international game of competitive armaments, aa
they have one after another become ambitious to
push the enterprises of their business men in the
international markets. An armament is service-
able only if it is relatively large ; its absolute
magnitude is a matter of no particular consequence
for competitive politics. It is its comparative size
that counts. Hence the greater the several arma-
ments, the greater the political need of greatar
armaments, and the prompter the resentment of
injuries and tlie livelier the felt need of offending
and of taking offence. A progressively larger pro-
portion of the nation's forces are withdrawn from
industry and devoted to warlike ends. In this
cumulative diversion of effort to warlike ends a
point is presently reached beyond which the ques-
tion of armament is no longer, What amount of
warlike expenditm* is needed to extend or main-
tain business traffic? but rather, What amount
will the nation's resources bear? But the pro-
gres.sion does not atop at that point : witness the
case of Italy, France, and Germany, where the war
drain has visibly impaired the industrial

BUSINESS IN LAW AND POLITICS

of the several uations concerned, but where the
burden atUl goea on growing, with no stopping-
place in sight. England and, more particularly,
America are not so near exhaustion, because they
have larger resources to draw on as well as a culture
and a population more efficient for industrial work.
But there is no evident reason why these two
should not likewise enter on a policy of emulative
exhaustion, and so 8acri6ce their aggregate indus-
trial and business interest to the furtherance of the
"great game."

^pi The question may suggest itself, Why should
not the business community, who have a large
discretion in international politics and whose
aggregate gains are cut into by excessive war ex-
penditures, call a halt when the critical point is
reached ? There is more than one reason for their
failure to do so. War and preoccupation with
warlike enterprise breed a warlike animus in the
community, as well as a habit of arbitrary, auto-
cratic rule on the part of those in autliority and
an unquestioning, enthusiastic subservience on the
part of the subjects. National animosity and
national pride demand more and more of military
standing, at the same time that the growing
official class needs increasing emoluments and a

rid of employmeut and display. T^e
iffects of tlie discipline of warfare and

300 THE THEORY OF BUSINESS ENTERPRISE

armament are much the same whether it is under-
taken for dynastic or for business ends ; in eithM
case it takes on a dynastic complexion and breeds
the temperament, ideals, and institutional habits
proper to a dynastic system of politics. The.
farther it goes the more it comes to make use
of business interests as a means rather than an
end, as, e.g., in modem Germany, France, and Italy,
and in the Continental states of the sixteenth and
seventeenth centuries. The crown, court, bureau-
cracy, military establishment, and nobility, under
whatever designations, gradually come to their
own again in such a situation, and affairs again
come to turn on questions of the maintenance
and dignity of these superior elements of the popu-
lation. The objective end of protracted warhke
endeavor necessarily shifts from busuiess advan-
tage to dynastic ascendancy and courtly honor.
Business interests fall to the position of fiscal ways
and means, and business traffic becomes subservient
to higher ends, with a fair chance of ultimate exhaus-
tion or collapse through the bankruptcy of the state.
Business enterprise is an individual matter, not
a collective one. So long as the individual buM-
ness man sees a proximate gain for himself in
meeting the demands for war funds and materials
to maintain the courtly and official establishments
that go with military iK)litic8, it is nut in the

' Cf. Hobron, ImptrlalimH, pt. I. ch. VII., pu II. ch, I. and VII.

BUSINESS IN LAW AND FOT.rriCS 301

nature of the busineBs man to draw back. It is
always his profits, not his livelihood, that is iu-
Tolved ; the question which touches his profits
is the relative gainfulneas of alternative lines of
investment open to him. So long as the pecuniary
inducements held out by the state, in bidding for
funds or supplies, overbalance the inducements
offered by alternative lines of employment, the
business men will supply these demands, regardless 1
of what the ulterior substantial outcome of sucli aj
course may be in the end. Funds and business
enterprise are now of so pronounced an interna-
tional or cosmopolitan character that any business
man may, even without fully appreciating the
fact, lend his aid to the fisc of a hostile power as
readily as to a friendly power or to the home gov-
ernment ; whereby an equable and comprehensive
exhaustion of the several communities involved
in the concert of nations is greatly facilitated.
Barring accidents and untoward cultural agencies
from outside of poHtics, buamess, or religion, there
ifi nothing in the logic of the modem situation
that should stop the cumulative war expenditures
short of industrial collapse and consequent national
bankruptcy, such as terminated the carnival of
war and politics that ran its course on the Conti-
nent in the sixteenth and seventeenth centuries."

> On the relation of buaiuesi to warlike expenditure In the slxuenUi
■od Mventeentb ceuturies, cf. Ehrenberg, Zrilaller drr Fuggtr.

CHAPTER IX

THE CULTURAL INCIDENCE OF THE MACH
PROCESS

So far as regards the non-mechanical factors of
culture, such as religion, politics, and even business
enterprise, the present is in a very large degree
comparable with tlie scheme of things that pre-
vailed on the Continent of Europe in the seven-
teenth century. And so far as the working of
these cultural factors is undisturbed by forces that
were not present in the older days, they should
logically again work out in such a situation as
came to prevail in Central Europe in the course of
the eighteenth centiu-y. The modern situation, of
course, is drawn on a larger scale ; but that is due
to the intrusion of a new technology, a different
"state of the industrial arts," and not to a
substantially altered range of religious, political, or
business conceptions. The pitch of squalor that
characterized vulgar Ufe in the busier Continental
countries at the close of the great era of politics
could probably not be reached again, but that
again, is due, not to these spuitual factors of cul-
tural growth, but to the altered state of the

^CIVILIZATION AND THE MACHINE PROCESS 3U;^

industrial arts. The factor in the modem situation
that is alien to the ancient regime is the machine
technology, with ita many and wide ramifications,
Business conceptions and business methods were
present in vigorous growth in Central Europe in the
sixteenth and seventeenth centuries, as they had
Ijeen in South Europe from a slightly earlier
date ; although the large sweep of business enter-
prise is not had until a later date, being conditioned
by the machine technology. Business methods
and the apparatus of business traffic develop very
promptly whenever and wherever tlie situation
calls for them ; such is the teaching of economic
history.^ There is nothing recondite about them,
little that has to be acquired by a protracted, cumu-
lative experience running over many generations,
such as is involved in technological development.
This business development in earlier modem times,
together with the accumulations of funded wealth
that came of this business enterprise, ran their
course to a finish in Continental Europe, leaving no
baais for a new start. The new start from which
the current situation takes its rise, in Europe and
elsewhere, was given to the Continental peoples by

> The perfected system of buBiaeas principles rests od the historlwl
bMis of free institutionH, and ro prenimeH a protratited hlslotical growth
of Uieae InstituUonH ; but a highly efficieut, though less perfect. boslaeH
nytlUtn wu narked out iu a relatively sburt lime by the South Mid
Central European peoples In early modem times on the baeis of a len
uonaummaM system of rights. — C(. Ehrenberg, ZeUtUter dtr Fugger ;
tfombart. Knpitalirmn; Tol. U. oh. VOL, XIV., XV.

304 THE THEORY OF BUSINESS ENTERFR16K

the English, ready-made, in the so-called Industrial
Revolution. The natural-rights metaphysics, to
which the eventual breakdown of the old Conti-
nental system owed its specific character, came also
from the English.'

In point of blood and cultural descent the popu-
lation of Great Britain did not differ materially
from their neighbors across the Channel or across
the North Sea.^ But from the beginning of the
modem cultural era Great Britain stood outside of
the general European situation, by force of its
physical isolation. So that during the modern era,
do^'fn to the close of the eighteenth century, the
British community was in the position of an inter-
ested thu'd party rather than a participant in the
political concert of Europe. The era of " state-
makiug," so called, is an era in which England
interferes, but ia, on the whole, not greatly inter-
fered with, so far as her own home affairs are
concerned. England, and presently Great Britain,
being reduced to law and order under one crown
and living in a condition of isolation and (rela-
tively) of internal peace, the cultural growth of
that country took a relatively peaceable direction.
The dominant note of everyday life was industry
and trade, not dynastic politics and war. This na-

' See ChapMt IV. above.

* Ct Keane, Man, Pail a>td Frcaent, ch. XIV. ; W, Z, Ripley, £ikw
of Kuropt; l.a,po\xge, L'Ary en; ^oateliOB, Let tempi prlhitorlguem
SuMe, etc. ; Andreu Hansen, MenneiketlxgttHi Slide.

' CIVILIZATION AiJD THE JIACHISE PROCESS 305

tional experience gave aa its outcome conatitutioual
government and the modern industrial technologj',
I together with the animus and the point of view of
' the modem materialistic science. The point of de-
parture for the more recent, current situation,
therefore, is a twofold one: (1) the British peace-
able variant of the Western culture has contributed
constitutional metliods and natural rights, together
■with the machine technology brought in under the
I head of the " industrial revolution"; and (2) there are
the patriotic ideals and animosities left as a residue
t of the warlike political traffic in Continental Europe.
Since the new departure, made on the basis of
t natural rights and modern industrial and scientific
i methods, the complex of nations and of intema-
I tional relations is a single, not a twofold one.
I.The stage over which affairs, political, industrial
f and cultural, run their course is no longer Conti-
nental or British, but cosmopolitan, comprising all
civilized communities and all civilized mterests.
So that there is not now, as there was in the
■mxteenth and seventeenth centuries, an isolation
f hospital for technolog}', science, and civil rights,
set apart from the general current of cultin^l
development- Whatever the forces at work in the
modem situation may eventually bring to pass,
\ therefore, the outcome must touch all communities
I in the same way and in approximately the same
I degree. If the outcome is dynastic politics

3(l(j VtW: THIiORV OF BUSINESS ENTt:RPRlSR

jiruiaiuent again played to a fliiiah in popular
squalor, aristocratic virtues, and universal bank-
ruptcy, there will be no peaceable community of
matter-of-fact mechanics and shopkeepers left in
reserve from which to make a new cultural and
industrial start. The modem technology has, in a
mamier, cut away the ground out of which it first
grew and from which it gathered force to reshape
the course of history. It has made it impossible
for any community to stand peaceably outside of
the great complex of nations.
'^ But within tlie comprehensive situation of to-day
there is tliis new factor, the machine process. In
an earlier chapter (11.) the technological character
of this machine process has been set forth at some
length. The machine process pervades the mod-
ern life and dominates it in a mechanical sense.
Its dominance is seen in the enforcement of precise
mechanical measurements and adjustment and the
reduction of all manner of things, purposes and
acts, necessities, conveniences, and amenities of life,
to standard units. The bearing of this sweeping
mechanical standardization upon business traffic is
a large part of the subject-matter of the foregoing
chapters. The point of immediate interest here is
the fm-ther bearing of the machine process upon
the growth of culture, — the disciplinary effect
which this movement for standardization and me-
chanical equivalence has upon the human material.

pIVILIZATlOX AND THE MACHINE PROCESS 307

^B This discipline falls more immediately on the
^Rworkmen engaged in the mechanical industries, and
^Bonly less immediately on the rest of the community
^^irhich lives in contact with this sweeping machine
^■p'ocess. Wherever the machine process extends, it
^Baets the pace for the workmen, great and small.
The pace is set, not wholly by the particular processes
in the details of which the given workman is im-
mediately engaged, but in some degree by the more
comprehensive process at large into which the
given detail process fits. It is no longer simply
that the individual workman makes use of one or
more mechanical contrivances for effecting certain
results- Such used to be his office in the earlier
phases of the use of machines, and the work which
he now has in hand still has much of that character.
^LBut such a characterization of the workman's part
^Bin industry misses the peculiarly modern feature of
the case. He now does this work as a factor in-
volved in a mechanical process whose movement
» controls his motions. It remains true, of course,
ta it always has been true, that he is the intelUgent
Agent concerned in the process, while the machine,
furnace, roadway, or retort are inanimate structures
devised by man and subject to the workman's
supervision. But the process comprises him and
his intelligent motions, and it is by virtue of his
necessarily taking an intelligent part in what is
[oing forward that the mechanical process has its

308 THE THEORY OF BUSINESS ENTEKPKI8E

chief effect upon him. The process standardizea
his supervision and guidance of the machine.
Mechanically speaking, the machine is not his to
do with it as his fancy may suggest. His place is
to take thought of the machine and its work in
terms given him by the process that is going for-
ward. His thinking in the premises is reduced to
standard units of gauge and grade. If he fails of
the precise measure, by more or less, the exigencies
of the process check the aberration and drive home
the absolute need of conformity.

There results a standardization of the workman's
intellectual life in termsof mechanical process, which
is more unmitigated and precise the more compre-
hensive and consummate the industrial process
in which he plays a part. This must not be taken
to mean that such work need lower the degree of
intelligence of the workman. No doubt the con-
trary is nearer the truth. He is a more efficient
workman the more intelligent he is, and the dis-
cipline of the machine process ordinarily increases
his efficiency even for work in a different line from
that by which the discipline is given. But the
intelligence required and inculcated in the machine
industry is of a peculiar character. The machine
process is a severe and insistent disciplinarian in
point of intelligence. It requires close and unre-
mitting thought, but it is thought which runs in
standard terms of quantitative precision. Broadly,

I
I

CIVILIZATION AND THE MACHINE PROCESS 301)

other intelligence on the part of the workman is
useless ; or it is even worse than useless, for a
hahit of thinking in other than quantitative terms
blurs the workman's quantitative apprehension of
the facts with which he has to do.'

In so far as he is a rightly gifted and fully dis-
ciplined workman, the final term of his habitual
thinking is mechanical efficiency, understanding
"mechanical" in the sense in which it is used
above. But mechanical efficiency is a matter of
precisely adjusted cause and effect. What the dis-
cipline of the machine industry inculcates, there-
fore, in the habits of life and of thought of the
workman, is regularity of sequence and mechanical
precision ; and the intellectual outcome is an habit-
ual resort to terms of measurable cause and effect,
together with a relative neglect and disparagement
of such exercise of the intellectual faculties as does
not run on these lines.

Of course, in no case and with no class does the
discipline of the machine process mould the habits
of life and of thought fuUy iuto its own image.
There is present in the human nature of all classes
too large a residue of the propensities and aptitudes
carried over from the past and working to a differ-
ent residt. The machine's regime has been of too

) II, e.g., he lakes to myth-makiag and peraonifies the machloe or
Ibe procew and imputes puipose and benevolence to tlm mei^hnnlrnl
■ippUuiCM, After the manner of current nareenr Uttes and pulpit nrntori
o go wrong.

310 THE THEORY OF BUSINESS ENTERPRISE

short duration, strict as its discipline may be, and
the body of inherited traits and traditions is too com-
prehensive and consistent to admit of anything more
than a remote approach to such a consummation.

The machine process compels a more or less un-
remitting attention to phenomena of an impersonal
character and to sequences and correlations not
dependent for their force upon human predilection
nor created by habit and custom. The machine
throws out anthropomorphic habits of thought. It
compels the adaptation of the workman to his work,
rather than the adaptation of the work to the work-
man. The machine technology rests on a knowl-
edge of impersonal, material cause and effect, not
on the dexterity, diligence, or personal force of the
workman, still less on the habits and propensities
of the workman's superiors. Within the range of
this machine-guided work, and within the range
of modem life so far as it is guided by the machine
process, the course of things is given mechanically,
impersonally, and the resultant discipline is a
di.scipline in the handling of impersonal facts for
mechanical effect. It inculcates thinking in terms
of opaque, impersonal cause and effect, to the
neglect of those norms of validity that rest on
usage and on the conventional standards handed
down by usage. Usage counts for little in shaping
the processes of work of this kind or in shaping the
inode.s of thought induced by work of this kind.

CIVILIZATIOy AND THE MACHINE PROCESS 31i

The machine procesa gives no insight into ques-
tions of good and evil, merit and demerit, except
in point of material causation, nor into the founda-
tions or the constraining force of law and order,
except such mechanically enforced law and order
as may be stated in terms of pressure, temperature,
velocity, tensile strength, etc.' The machine tech-
nology takes no cognizance of conventionally
established rules of precedence ; it knows neither
manners nor breeding and can make no use of
any of the attributes of worth. Its scheme of
knowledge and of inference is based on the laws
of material causation, not on those of immemorial
custom, authenticity, or authoritative enactment.
Its metaphysical basis is the law of cause and
effect, which in the thinking of its adepts has dis-
placed even the law of sufficient reason.*

The range of conventional truths, or of institu-
tional legacies, which it traverses is very compre-
hensive, being, indeed, all-inclusive. It is but
little more in accord with the newer, eighteenth-
century conventional truths of natural righta,

' Sucb exprenions as "good and ill," "merit uid demerit,"
'•Imw »nd order," when applied to technological facia or to Uie out-
come of material science, are evidently only metaphorical expressions,
borrowed from older usage and serviceable ooly as liguree of iipeech.

* Tsrde, Ptgchnlogie Ecjiiioinujiir. vol. I. pp. 122-131, offera a char-
acterization of the psychology of modem nork, contrasling, among
other things, the work of Uie machine workman with that of the
handicraftsman in respectof its psychological requireroeols and eBecls.
. Ii may be taken as a temperate formuiation of the cur
k places on this topic, and seeniB to be fairly wide of the mark.

312 THE THEORY OF BUSINESS BNTEEPRISE

natural liberty, natural law, or natural religiooi
than with the older norms of the true, the beauti-
ful, and the good which these displaced. Anthropo-
morphism, under whatever disguise, is of no use
and of no force here.

The discipline exercised by the mechanical occu-
pations, in so far as it is in question here, is a
discipline of the habits of thought. It is, there-
fore, as processes of thought, methods of apper-
ception, and sequences of reasoning, that these
occupations are of interest for the present purpose;
it is as such that they have whatever cultural
value belongs to them. They have such a value,
therefore, somewhat in proportion as they tax the
mental faculties of those employed; and the largest
effects are to be looked for among those industrial
classes who are required to comprehend and guide
the processes, rather than among those who serve
merely as mechanical auxiliaries of the machine
process. Not that the latter are exempt from the
machine's discipline, but it falls upon them blindly
and enforces an uncritical acceptance of opaque
results, rather than a theoretical insight into the
causal sequences which make up the machine
process. The higher degree of training in such
matter-of-fact habits of thought is accordingly to
be looked for among the higher ranks of skilled
mechanicfl, and perhaps .'^till more decisiveljf

11UZA.TI0N AND THE MACHINE PROCESS 313
ing thoee who stand in an en^neering or
supervisory relation to the processes. It coimta
more forcibly and farthest among those who
are required to exercise what may be called a
mechanical discretion in the guidance of the
industrial processes, who, as one might say, are
required to administer the laws of causal sequence
that run through material phenomena, who there-
fore must learn to think in the terms in which
the machine processes work.' The metaphysical
ground, the assumptions, on which such thinking
proceeds must be such as will hold good for the
sequence of material phenomena ; that is to say, it

' For iometliiiig more th&a a bundred years post this change in the
habits of thought of the workman has been commonly spoken of m a
del^oratioQ or numbing of his intelligence. But that seems too
sweeping a cliaractetization of the change brought on by habituation
to machiue work. It is sate to say that such habituation brings a
change in the workman's habiliH ol thought, — in the direction, method,
andcoDtentof his thinking, — heightening his intelligence for some pur-
poses and lowering it for certain others. No doubt, on the whole, the
machine's discipline lowers the intelligcQce of the workman for such
purposes as were rated high as marks of intelligence tiefore the com-
ing of the machine, but it appears likewise U< heighten bis intelligence
for such purposes as have been brought to the front by the machine.
If be is by nature scantily endowed with the aptitudes that would make
him Ihhik effectively in terms of the machine process, if he has intel-
lectual capacity for other things and not for this, then the tinning of
the machine may fairly be said to lower his intelligence, since it hinders
the tnll derelopment of the only capacities of which he is poneased.
The tesulttng difference in intellectnai training is a difference in Idnd
and direction, not necessarily In degree. Ct. SchmoUer, OrundriM
i«r VoUaneirtKhaJlshhre, vol. I. sees. 86-86, l.SZ ; Hobeon, Enolution
0/ Modem CapUalitm, ch, IX. sees. 4 and 5 ; Cooke Taylor, Modem
FaetOTf Si/tUn, pp. 4.14-(.^5 ; Sidney and Beatrice Webb, Industrial
Dtmneraq), e.g. pp. 327 «t »'q. ; E. Th. Beinhold, Arbeit und Wrfkttufi.
ch. X. (particularly pp. 190-198) and cb. XL (parUcularly pp. 2!i\--i*v ..

314 THE THEORY OF BUSINESS ENTERPRISE

is the metaphysical assumptions of modern mate-
rial science, — the law of cause and effect, cumula-
tive causation, conservation of energj", persistence
of quantity, or whatever phrase be chosen to cover
the concept. The men occupied with the modem
material sciences are, accordingly, for the purpose
in hand, in somewhat the same case as the higher
ranks of those employed in mechanical industry.'

Leaving aside the archaic vocations of war, poli-
tics, fashion, and religion, the employments in
which men are engaged may be distinguished as
pecuniary or business employments on the one
hand, and industrial or mechanical employments
on the other hand.' In earlier times, and indeed
until an uncertain point in the nineteenth century,
such a diatmction between employments would not
to any gi-eat extent have coincided with a differ-
ence between occupations. But gradually, as time
has passed and production for a market has come
to be the rule in industry, there has supervened a
differentiation of occupations, or a division of
labor, whereby one class of men have taken over
the work of purchase and sale and of husbanding a
store of accumulated values. Concomitantly, (rf
course, the rest, who may, for lack of means or (d

■ Cr. J. C. Sutherland, " The Engineeriiig Mind," Popular SetenM
Monthly, Januaij 1903, pp. 254^56.

* CI. "Indnatrial «inl PcpuiiUry Employraents," ejipeciftll; pp.

1H8-218.

CIVILIZATION AND THE MACHINE PEOCESS 315

pBcaniary aptitude, have been less well fitted for
pecuniary pursuits, have been relieved of the cares
of business and have with increasing specialization
given their attention to the mechanical processes
involved in this production for a market. In this
way the distinction between pecuniary and indus-
trial activities or employments has come to coin-
cide more and more nearly with a difference
between occupations. Not that the specialization
has even yet gone so far as to exempt any class
from all pecuniary care ; ' for even those whose
daily occupation is mechanical work still habitually
bargain with their employers for their wages and
with others for their supplies. So that none of the
active classes in modem life is fully exempt from
pecuniary work.

But the need of attention to pecuniary matters
is less and less exacting, even in the matter of
wages and supplies. The scale of wages, for in-
etance, is, for the body of workmen, and also for
what may be called the engineering force, becoming
more and more a matter of routine, thereby lessen-
ing at least the constancy with which occasions

> As G. F. Stiffen has described it: "Thcwe who hire out their
labor power or tbeir capit&i or Ibeii land to the eDtrepreneurs are ag a
nl« not »bBoliit«ly passive as speti from the poitit of view of biwInesB
•nUipriae. The)' are cot Himpl? inanimate implemenla in the hands
of the entrepreneurs. The; are ' ecUrprising implemeiiU ' (fdreU-
gind« verktjrg) who Gmrender tbeir nndertaking tunctiona only to the
•xteot dcalgnattd in the contract with the eotrepretieur." — fjtdii".
Mf>ir Tidtkrifl, vol. V. p. 266,

316 THE THEORY OF BUSIiraSS ENTERPRISE

for detail bargaining in this respect recur. So also
as regards the purchase of consumable goods. In
the cities and industrial towns, particularly, the
supplying of the means of subsistence has, in
great part, become a matter of routine. Retail
prices are in an increasing degree fixed by the
seller, and in great measure fixed in an impersonal
way. This occurs in a particularly evident and
instructive way in the practice of the department
stores, where the seller fixes the price, and comes
in contact with the buyer only through the inte^
vention of a salesman who has no discretion as to
the terms of sale. The change that has taken
place and that is still going on in this respect is
sufficiently striking on comparison with the past
in any industrial community, or with the present
in any of those communities which we are in the
habit of calling " industrially backward."

Conversely, as regards the men in the pecuniary
occupations, the business men. Their exemption
from taking thought of mechanical facta and
processes is likewise only relative. Even those
business men whose business is in a peculiar de-
gree remote from the handling of tools or goods,
and from the oversight of mechanical processes, as,
for example, bankers, lawyers, brokers, and the
like, have still, at the best, to take some cognizance
of the mechanical apparatus of everyday life;
they are at least compelled to take some thought

VILIZATION AND THE MACHINE PROCESS 317

what may be called the mechanica of consump-
tion. Whereas those business men whose business
is more immediately concerned with industry com-
monly have some knowledge and take some
thought of the processes of industry ; to some
appreciable extent they habitually think in me-
chanical terms. Their cogitations may habitually
run to pecuniary conclusions, and the test to
which the force and validity of their reasoning
ia brought may habitually be the pecuniary out-
come ; the beginning and end of their more seri-
ous thinking is of a pecuniary kind, but it always
takes in some general features of the mechanical
process along the way. Their exemption from
mechanical thinking, from thinking in terms of
cause and effect, is, therefore, materially qualified.

But after all qualifications have been made, the
fact still Is apparent that the everyday life of
those classes which are engaged in business differs
materially in tlie respect cited from the life of the
classes engaged in industry proper. There is an
appreciable and widening difference between the
habits of life of the two classes ; and this carries
with it a widening difference in the discipline to
which the two classes are subjected. It induces a
difference in the habits of thought and the habitual
grounds and methods of reasoning resorted to by
1 class. There results a difference in the point
, in the facts dwelt upon, in the methods

318 THE THEORY OF BUSINESS ENTEIil'KlSE

of argument, in the grounds of validity appealed
to; and this difference gaina in magnitude and
consistency as the differentiation of occupations
goes on. So that the two classes come to have an
increasing difficulty in understanding one another
and appreciating one another's convictions, ideals,
capacities, and shortcomings.

The ultimate ground of validity for the thinking
of the business classes is the natural-rights ground
of property, — a conventional, anthropomorpbic
fact having an institutional validity, rather than a
matter-of-fact validity such as can be formulated
in terms of material cause and effect; while the
classes engaged in the machine industry are
liabitually occupied with matters of causal se-
quence, which do not lend themselves to statement
in anthropomorphic terms of natural rights and
which afford no guidance in questions of institu-
tional right and wrong, or of conventional reason
and consequence. Arguments which proceed on
material cause and effect cannot be met with
arguments from conventional precedent or dialefr
tically sufficient reason, and conversely.

The thinking required by the pecuniary occupar
tiona proceeds on grounds of conventionality,
whereas that involved in the industrial occupa-
tions runs, in the main, on grounds of mechanical
sequence or causation, to the neglect of conven-
tionality. The institution (habit of thought) <^

owiierahip or property is a conveutional fact; iiml
the logic of pecuniary thinking — that ia to say, of
thinking on matters of ownership — ia a working
out of the implicatioiia of tliis postulate, this con-
cept of ownership or property. The characteristic
habits of thought given by such work are habits
of recourse to conventional grounds of finaHty or
validity, to anthropomorphism, to explanations
of phenomena in terms of human relation, discre-
tion, authenticity, and choice. The final ground of
certainty in inquiries on this natural-rights plane
is always a ground of authenticity, of precedent,
or accepted decision. The argument is an argu-
ment de jure, not de facto, and the training given
lends facihty and certainty in the pursuit of de
jure distinctions and generalizations, rather than
in the pursuit or the assimilation of a de facto
knowledge of impersonal phenomena. The end of
such reasoning is the interpretation of new facts
in terms of accredited precedents, rather than a
revision of the knowledge drawn from past experi-
ence in the matter-of-fact light of new phenomena.
The endeavor is to make facts conform to law,
not to make the law or general rule conform to
facts. The bent so given favors the acceptance of
the general, abstract, custom-made rule as some-
thing real with a reality superior to the reality of
impersonal, non -conventional facts. Such training
Jives reach and subtlety in metaphysical argu-

320 THE THEORY OF BUSINESS ENTERPRISE

ment and in what ia known as the '' practical"
management of affairs ; it gives executive or ad-
ministrative efficiency, so-called, as distinguished
from mechanical work. " Practical " efficiency
means the ability to turn facta to account for
the purposes of the accepted conventions, to give
a large effect to the situation in terms of the
pecuniary conventions in force.'

The spiritual attitude given by this training in rea-
soning dejure, from pecuniary premises to pecuniary
conclusions, is necessarily conservative. This species
of reasoning assumes the validity of the conven-
tionally established postulates, and is consequently
unable to take a sceptical attitude toward these
postulates or toward the institutions in which these
postulates are embodied. It may lead to scepticism
touching other, older, institutions that are at vari-
ance with its own (natural-rights) postulates, but its
scepticism cannot touch the natural-rights ground
on which it rests its own case. In the same man-
ner, of course, the thinking which runs in material
causal sequence cannot take a sceptical attitude
toward its fundamental postulate, the law of cause
and effect ; but since reasoning on this materialistic
basis does not visibly go to uphold the received

> Cf., on tie other hand, Heiahold, Arbeit und Werlasevg, eh. HL
Mid XIV,, where double deftUng Is confused with woAnnuiahJp, vtaj
much after the manner familiar to readers of expoaltions (
" wages of aupeiinwndenoe,*' but more broadly and ingealoiial; tl

altions of the I
ieolonal; than I

ILIZAXIOX AND THE MACHINE PROCESS ;^21

kcti

ititutione, the attitude given by the discipline of
the machine technology cannot, for the present, be
called a conservative attitude.

The buainess classes are conservative, on the
whole, but such a conservative bent is, of course,
not peculiar to them. These occupations are not
the only ones whose reasoning prevailingly moves
on a conventional plane. Indeed, the intellectual
acti\ity of other classes, such as soldiers, politicians,
the clergy, and men of fashion, moves on a plane of
still older conventions ; so that if the training
given by business employments is to be character-
ized as conservative, that given by these other,
more archaic employments should he called re-

;ionary.' Extreme conventionalization means

' Individual exceptlona are, of coane, to be foand in all claaaea,
but there is, after all, a more or less coDBlsMiit, prevalent class attitude.
Ab ia well Kdowii, clergymen, lawyers, soldiers, civil servants, and
tbe like, are popularly beld to be of a conaervalive, if not reactionary
temper. This vulgar apprebension may be faulty in deiail, and espe-
cially it may be too sweeping In its generalizations ; bnt tbere are,
after all, tew persons not belonging to these classes who will not
Immediately reoogniEe that this vulgar appraisement of them rests on
substantial grounds, even though the appraisement may need qualifi-
cation. So, also, a conservative animus ia seen to pervade ail classes
more generally in earlier times or on more archaic levels of culture
than our own. At the same time, in Lbose early days and in tbe
more archaic cultural regions, tbe structure of conventionally accepted
truths and the body of accredited spiritual or extra-mate rial (acts are
moi« comprehensive and rigid, and the thinking on all topics is more
consistently beld to tests of authenticity as contrasted wiib tests of
sense perception. On the whole, tbe number and variety of things
that are fundamentally and eternally true and good increase as one
^■'|DM outward from the modem West-European cultural centres into
^■Mle earlier baibarias past or into the i«iiuiter barbarian present.

322 THE THEORY OF BUSINESS ENTERPRISE

extreme conservatism. Conservatism means the
maintenance of conventions already in lorce. On
this head, therefore, the discipline of modem busi-
ness life may be said simply to retain something
of the complexion which marks the life of the
higher barbarian culture, at the same time that it
has not retained the disciplinary force of the bar-
barian culture in so high a state of preservation as
some of the other occupations just named.

The discipline of the modern industrial employ-
ments is relatively free from the bias of conven-
tionality, but the difference between the mechanical
and the business occupations in this respect is a dif-
ference of degree. It is not simply that conven-
tional standards of certainty fall into abeyance
for lack of exercise, among the industrial classes.
The positive discipline exercised by their work in
good part runs counter to the habit of thinking iu
conventional, anthropomorphic terms, whether the
conventionality is that of natural rights or any
other. And in respect of this positive training
away from conventional norms, there is a large
divergence between the several lines of industrial
employment. In proportion as a given line of
employment has more of the character of a ma-
chine process and less of the character of handi-
craft, the matter-of-fact training which it gives
is more pronoimced. In a sense more intimate
than the inventors of the phrase seem to have

VILIZATIU.V iil> THE MACHINE PEWESS 323

^■|>preciated, the macbiae has become the master
of the man who works with it and an arbiter in
the cultural fortunes of the community into whose
life it has entered.
^U The intellectual and spiritual training of the ma-
Biehine in modem Ufe, therefore, is very far-reaching.
It leaves but a small proportion of the community
untouched ; but while its constraint is ramified

» throughout the body of the population, and con-
Irtrains virtually all classes at some points in
their daily life, it falls with the most direct,
intimate, and unmitigated impact upon the skilled
mechanical classes, for these liave no respite from
hita mastery, whether they are at work or at play.
The ubiquitous presence of the machine, with
spiritual concomitant — workday ideals and
septicism of what is only conventionally valid —
I the unequivocal mark of the Western culture
: to-day as contrasted with the culture of other
mes and places. It pervades all classes and
' strata in a varying degree, but on an average in
a greater degree than at any time in the past, and
most potently in the advanced industrial commu-
^Ljiities and in the classes immediately in contact with
^Bhe mechanical occupations.' As the comprehen-
sive mechanical organization of the material side
of life has gone on, a heightening of this cultural
effect throughout the commimity has also auper-

' Ree Cli^iptet II. above.

324 THE THEOKY OF BUSINESS ENTERPRISE

vened, and with a farther and faster movement in
the same direction a farther accentuation of this
" modem " complexion of culture is fairly to be
looked for, unless some remedy be found. And
as the concomitant differentiation and specializa-
tion of occupations goes on, a still more unmiti-
gated discipline falls upon ever widening classes
of the population, resulting in an ever weakening
sense of conviction, allegiance, or piety toward the
received inatitutions.

It is a matter of common notoriety that the
modem industrial populations are improvident in
a high degree and are apparently incapable of
taking care of the pecuniary details of their own
life. This applies, not only to factory hands, but
also to the general class of highly skilled mechanics,
inventors, technological experts. The rule does
not hold in any hard and fast way, but it holds
with such generality as may fairly be looked for.
The present factory population may be compared
in this respect with the class of handicraftsmen
whom they have displaced, as also with the farm-
ing population of the present time, especially the
class of small proprietary farmers. The failure
of the modem industrial classes on this head is not
due to scantier opportunities for saving, whether
they are compared with the earlier handicraftsmen
or with the modem farmer or peasant ; nor is it

CIVILIZATION AND THE MACHINE PROCESS 325

due to a lack of general intelligence, for a com-
parison in point of intelligence falls out in favor
of the modem industrial workmen. This improvi-
dence is commonly discussed in terms of depreca-
tion, and there is much preaching of thrift and
steady habits. But the preaching has no appre-
ciable effect. The trouble seems to be of the
nature of habit rather than of reasoned conviction.
Other causes may partially explain this improvi-
dence, but the inquiry is at least pertinent how
far the absence of property and thrift among them
may be traceable to the relative absence of pe-
cuniary training and to the presence of a discipline
which is at variance with habits of thrift.

Mere exemption from pecuniary training is not
competent alone to explain the patent thriftless-
neas of modem workmen ; the more so since this
exemption is but partial and relative. Also, the
thriftless classes commonly have an envious ap-
preciation of pecuniary advantages. It is rather
the composite effect of exemption from pecuniary
training and certain positive requirements of
modem life. Among these positive requirements
is what has been called the canon of conspicuous
waste. Under modern conditions a free expendi-
tm« in consumable goods is a condition requisite
to good repute.' This conduces to iuimediate oon-
mnnption rather than to saving. What is perhapn

^L ' CL Thcorn u/Ihe Ltiaitrt Clan, Mpecially cb. IV. and V.

326 THE THEORY OF BUSINESS ENTERPBISi:

still more decisive against thrift on the part of
workmen is the fact that the modem large organi-
zation of industry requires a high degree of mo-
bility on the part of employees. It requires, in
fact, that the labor force and the labor units be
mobile, intercliangeable, distributable, after the
same impersonal fashion as the mechanical con-
trivances engaged are movable and distributable.
The working population is required to be standard-
ized, movable, and interchangeable in much the
same impersonal manner as the raw or half-
wrought materials of industry. From which it
follows that the modem workman cannot advan-
tageously own a home. By force of this latter
feature of the case he is discouraged from invest-
ing his savings in real property, or, indeed, in any
of the impedimenta of living. And the savings-
bank account, it may be added, offers no adequate
substitute, as an incentive to thrift, in the place of
such property as a dwelling-place, which is tan-
gibly and usefully under the owner's hand and
persistently requires maintenance and improve-
ment.

The conditions of life imposed upon the working
population by the machine industry discourage
thrift. But after allowance has been made for
this almost physical restraint upon the aquisition
of property by the working classes, something is
apparently left over, to be ascribed tn tlie moral

k-CIVILIZATION AND THE MACHINE PROCESS 327

fc«ffect of the machine technology. The industrial
I. classes appear to be losing the instinct of individual
I ownership. The acquisition of property is ceasing
I to appeal to them as a natural, self-evident source
I of comfort and strength. The natural right of
\ property no longer means so much to them as it

once did.

A like weakening of the natural-rights animus is

visible at another point in the current frame of mind

I of these classes. The growth of trade-unionism
and of what is called the trade-union spirit is a
«oncomitantof industry organized after the manner
of a machine process. Historically this growth
begins, virtually, with the industrial revolution,
-coming in sporadically, loosely, tentatively, with
no precise assignable date, very much as the revo-
lution does. England is the land of its genesis, its
"area of characterization," and the place where it
has reached its fullest degree of specification and
its largest force ; just as England is the country in
which the modern machine industry took its rise and
bin which it has had the longest and most consistent
Ilife and growth. In this matter other countries
■Are followers of the British lead and apparently
I borrowers of British precedents and working con-
I oepts. Still, the history of the trade-union move-
Ijnent in other countries seems to say that the
■Working classes elsewhere have not advisedly bor-
liowed ideals and methods of organization from

328 THE THEORY OF BUSINESS ENTERPRISE

their British congeners ao much as they have been
pushed into the aarae genera! attitude and line of
conduct by the same general line of exigencies and
experiences. Particularly, experience seems to say
that it is not feasible to introduce the trade-union
spirit or the trade-union rules into any commmiity
until the machine industry has had time extensively
to standardize the scheme of work and of life for the
working classes on mechanical linea. Workmen
do not take to full-blown trade-union ideals abruptly
on the introduction of those modem business
methods which make trade-union action advisable
for the working class. A certain interval elapses
between the time when business conditions first
make trade-union action feasible, as a business
proposition, and the time when the body of work-
men are ready to act in the spirit of trade-unionism
and along the lines which the union animus
presently accepts as normal for men in the mechan-
ically organized industries. An interval of disci-
pline in the ways of the mechanically standardized
industry, more or less protracted and severe, seems
necessary to bring such a proportion of the work-
men into line as will give a consensus of sentiment
and opinion favorable to trade-union action.

The pervading characteristic of the trade-linion
animus is the denial of the received natural-ri^ts
dogmas wherever the mechanical standardization of
modem industry traverses the working of these

, CIVILIZATION AND THE MACHINE I'ROCESS 329

lived natural rights. Recent court decisions iu
America, as well as decisions in analogous caaee
in England at that earlier period when the British
development was at about the same stage of ma-
turity as the current American situation, testify
unequivocally that the common run of trade-union
action is at variance with the natural-rights founda-
tion of the common law. Trade-unionism denies
individual freedom of contract to the workman, as
well as free discretion to the employer to cany on
his business as may suit his own ends. Many pious
phrases have been invented to disguise this icono-
clastic trend of trade-union aims and endeavors;
but the courts, standing on a secure and familiar
natural-rights footing, have commonly made short
work of the shifty sophistications which trade-union
advocates have offered for their consideration.
They have struck at the root of the matter in
declaring trade-union regulations inimical to the
natural rights of workman and employer alike, in
that they hamper individual liberty and act in
restraint of trade. The regulations, therefore, vio-
late that system of law and order which rests on
natural rights, although they may be enforced by
that de facto law and order which is embodied
in the mechanical standardization of the industrial
processes.

Trade-unionism is an outgrowth of relatively
late industrial conditions and has come on gradu-

330 THE THEORY OF BUSINESS ENTERFKISE

ally as an adaptation of old methods and work-
ing arrangements carried over from the days of
handicraft and petty trade. It is a movement
to adapt, construe, recast, earlier working arrange-
ments with as little lesion to received preconcep-
tions as the new exigencies and the habits of
thought bred by them will permit. It is, on ita
face, an endeavor of compromise between received
notions of what " naturally " tmght to be in mat-
ters of industrial business, on the one hand, and
what the new exigencies of industry demand and
what the new animus of the workman will toler-
ate, on the other hand. Trade-unionism is therefore
to be taken as a somewhat mitigated expression
of what the mechanical standardization of industry
inculcates. Hitherto the movement has shown a
fairly uninterrupted gi-owth, not only in the num-
bers of its membership, but in the range and scope
of its aims as well ; and hitherto it has reached
no halting-place in its tentative, shifty, but ever
widening crusade of iconoclasm against the re-
ceived body of natural rights. The latest, maturest
expressions of trade-unionism are, on the whole,
the most extreme, in so far as they are directed
against the natural rights of property and pecun-
iary contract.

The nature of the compromise offered by trade*
unionism is shown by a schedule of its demands;
collective bargaining for wages and employment;

^LIZATION AND THE MACHINE PROCESS 331

arbitration of differences between owners and
workmen; standard rates of wages; normal work-
ing day, with penalized regulation of hours for
men. women, and children ; penalized regulation
of sanitary and safety appliances; mutual insur-
ance of workmen, to cover accident, disability, and
unemployment. In all of this the aim of union-
ism seldom goes the length of overtly disputing
the merits of any given article of natural-rights
dogma. It only endeavors to cut into these
articles, in point of fact, at points where the
dogmas patently traverse the conditions of life
imposed on the workmen by the modem industrial
system or where they traverse the consensus of
sentiment that is coming to prevail among these
workmen.

When unionism takes an attitude of overt hos-
tility to the natural-rights institutions of property
and free contract, it ceases to be unionism simply
and passes over into something else, which may be
called socialism for want of a better term. Such
an extreme iconoclastic position, which would
overtly assert the mechanical standardization of
industry as against the common-law standardiza-
tion of business, seems to be the logical outcome
to which the trade-union animus tends, and to
which some approach has latterly been made by
^more than one trade-unionist body, but which is,
^■b the whole, yet in the future, if, indeed, it is to

332 THE TKEOKY OF BUSINESS ENTEEPBISF.

be reached at all. On the whole, the later ex-
pressions go farther in this direction than the
earlier; and the animus of the leaders, as well
as of the more wide-awake body of unionist work-
men, appears to go farther than their oIEcial
utterances.

A detail of trade-imion history may be cited in
ilhtstration of their attitude toward the natural-
rights principles that underlie modern business
relations. As is well known, trade-unions have
somewhat consistently avoided pecuniary responsi-
bility for the actions of their members or officials.
They avoid incorporation. Practically an employer
has had no recourse in case he suffers from a failure
on the part of his union workmen to live up to the
terms of an agreement made with the union. In
English practice this exemption from pecuniary
responsibility has acquired much of the force ol
law, and indeed was supposed to have gained the
countenance of statutory enactment, ujitil, within
the past few months, the so-called Taff Vale
decision of the House of Lords reversed the views
which had come to prevail on this head. This
decision, by the most conservative tribunal of the
British nation, is too recent to permit its conse-
quences for trade-unionism to be appreciated. But
it seems fair to expect that tlie question which the
decision brings home to the unions will be, How
is this court-made pecuniary responsibility

7ILIZATI0N AND THE MACHINE PROCESS 333

tra

be evaded? not, How is it to be lived up to?
Patently,' the decision is unexceptionable under
common law rules ; but, also patently,* it broadly
traverses trade-union practice and is wholly alien

the attitude of the trade-unionists."

The aaimu3 sho^vn by the trade-unionists in this
shirking of j>ecuniary responsibility is character-
istic of their attitude toward common law rules.
The unions and their methods of work are essen-
tially extra-legal. It is only reluctantly, as
defendants if at all, that unions are accustomed
to appear in court. When tliey make a move for
statutory enactment, as for the enforcement of a
normal day or of sanitary and safeguarding regula-
tions, it is prevailingly to criminal law that they
turn.
M To all this it might, of course, be said that the

^ * As, t.g., Mr. W. G. S. AdauiB cogenily points out in n recent
'iramberof the Journal of PolUkal Economy (December 1802).

* As Mr. Webb ahowa {Induilrlal Di-mocracy, 1902, pp. xxiv-
mri).

* The historical explanation of this HouGe of Lords reverKal of
uade-union practice ia probably to b« found in llie conserviiUTe, or
rather reactionary, trend given to British geDtiment by Uic imp<<riaJi«t
policy o( the Uat two or three decadea, accentuated by the experiences
iif the Boer War. The Iloer War seemg to mark a tumlug-poinl in thu
^ronth of eentiment and institutions. Since the seventies the Imperl.
allsl interest, that is to say, the dynastic interest, has been coming
into the foreground among the interastfi that engage the attention of
the British community. It Heeme now to liave dellnitlvely gained the
ilrat place, and may be eipected in the immediate future to dominate
British policy both at home and abroad. ConcomlMntly, it may be
remarlied, the British community has been sloning down, it not losing
groond, in industrial animus, technological elflclenry, tutd scientiflc
spliitL. CL Bobsou, ImperiuUain, part II. cb, I. and III.

334 THE THEORY OF BUSINESS EKTEKPRISE

workmen who make up the trade-union element
take the course indicated simply because their
selfish interest urges them to this course j that
their common necessities and common weakness
constrains them to stand together and to act collec-
tively in dealing with their employers ; while the
fact that their demands have no standing in court
constrains them to seek their ends by extra-legal
means of coercion. But this objection is little else
than another way of saying that the exigencies
forced upon the workmen by the mechanically
standardized industrial system are extra-legal exi-
gencies — exigencies which do not run in business
terms and therefore are not amenable to the
natural-rights principles of property and contract
that underlie busineas relations ; that they can
therefore not be met on common law ground ; and
that they therefore compel the workmen to see
them from another point of view and seek to dis-
pose of them by an appeal to other principles than
those afforded by the common law standpoint.
That is to say, in other words, these exigencies
which compel the trade-unionists to take thought
of their case in other terms than those afforded by
existing legal institutions are the means whereby
the discipline of the machine industry is enforced
and made effective for recasting the habits of
thought of the workmen. The harsh discipline of
these exigencies of livelihood drives home the new

'CIVILIZATION AND THE MACHINK I'KOCKSS Sift

point of view and holds the workmen consistently
to it. But that is not all that the mechanical
standardization of industry does in the case ; it
also furnishes the new terms in which the revised
scheme of economic life takes form. The revision
of the scheme aimed at by trade-union action runs,
not in terms of natural liberty, individual property
rights, individual discretion, but in terms of stand-
ardized livelihood and mechanical necessity ; it is
formulated, not in terms of business expediency, but
in terms of industrial, technological standard units
and standard relations.

The above presentation of the case of trade-
unionism is of course somewhat schematic, as such
a meagre, incidental discussion necessarily must be.
It takes account only of those features of trade-
unionism which cliaracteristically mark it off from
that business scheme of things with which it comes
in conflict. There are, of course, many survivals,
pecuniary and others, in the current body of trade-
union demands, and much of the trade-union argu-
ment is carried on iu business terms. The crudities
and iniquities of the trade-union campaign are suf-
ficiently many and notorious to require no rehearsal
here. These crudities and iniquities commonly bulk
large in the eyes of critics who pass an opinion
on trade-unioni.sm from the natural-rights point of
view ; and. indeed, they may deserve all the dis-
paraging attention that is given them. Trade-

336 THE THEOKV OF BUSINESS ENTEEPRI8E

uniouism does not fit into the natural-rights scheme
of right and honest living; but therein, in great
part, lies its cultural significance. It ia of the
essence of the case that the new aims, ideals, and
expedients do not fit into the received institutional
Btructure ; and that the classes who move in trade-
unions are, however crudely and blindly, endeavor-
ing, under the con}pulsion of the machine process,
to construct an institutional scheme on the lines
imposed by the new exigencies given by the
machine process.

The point primarily had in view in entering on
this characterization of trade-unionism was that
under the discipline of the mechanically standard-
ized industry certain natural rights, particularly,
those of property and free contract, are in a degree
falling into abeyance among those classes who are
most immediately subjected to this discipline. It
may be added that other classes also, to an uncer-
tain extent, sympathize with the trade-unionists
and are affected with a similar (mild and equivocal)
distrust of the principles of natural liberty. When
distrust of business principles rises to such a pitch
as to become intolerant of all pecuniary institutions,
and leads to a demand for the abrogation of prop-
erty rights rather than a limitation of them, it is
spoken of as " socialism " or " anarchism." This
Bocialistic disaffection is widespread among the

advanced industrial peoples. No other cultural
phenomenon is so threatening to the received eco-
nomic and political structure ; none is so unprec-
edented or so perplexing for practical men of
affairs to deal witli. The immediate point of
danger in the socialistic disaffection is a growing
disloyalty to the natural-rights institution of prop-
erty, but this is backed by a similar failure of re-
gard for other articles of the institutional furniture
handed down from the past. The classes affected
with socialistic vagaries protest against the exist-
ing economic organization, but they are not neces-
sarily averse to a somewhat rigorous economic
organization on new lines of their own choosing.
They demand an organization on industrial as con-
trasted with business lines. Their sense of eco-
nomic solidarity does not seem to be defective,
indeed it seems to many of their critics to be un-
necessarily pronounced ; but it runs on lines of
industrial coherence and mechanical constraint, not
on lines given by pecuniary conjunctures and con-
ventional principles of economic right and wrong.

There is little agreement among socialists as
to a programme for the future. Their construc-
tive proposals are ill-defined and inconsistent and
almost entirely negative. The negative character
of the isocialistic propaganda has been made a
point of' disparagement by its critics, perhaps
justly. But their predilection for shifty icono-

38 THK THEORY OF PUSINKRS ENTERFRISK

clasm, as well as the vagueness and inconsistency
of their constructive proposals, are in the present
connection to be taken as evidence that the atti-
tude of the socialists cannot be expressed in poai-
tive terms given by the institutions at present in
force. It may also be evidence of the untenability
of the socialistic ideals; but the merits of the
socialist contentions do not concern the present
inquiry. The question here is as to the nature
and causes of the socialist disaffection ; it does
not concern the profounder and more delicate
point, as to the validity of the socialist contentions.
Ciu'rent socialism is an animus of dissent from
received traditions. The degree and the direction
of this dissent varies greatly, but it is, within the
socialist scheme of thought, agreed that the insti-
tutional forms of the paat are unfit for the work
of the future.'

The socialistic disaffection has heen set down

' All this applies to aDarcbiHm as well as to socjalisia ; similarl; t'l
aeversl minor categories of dlmentienta. Id their negative proposals
the socialists and auarcblsts are fairly agreed. It is in the metaphys-
ical postulates of their protest and in their constructive aims that they
part company. Of the two, the socialists are more widely out of touch
with the eslahlished order. They are also more hopelessly negative
and destructive in their ideals, as seen from the standpoint of the
eotahlished order. This applies to tlie later sociallsU rather than xo
the earlier, and it applies, of course, only to Ibe lower-clasa, "demo-
cratic " Bociatlsta, not to the so-called state and Cliristlan socialists.

Anarchism proceeds on natural-rights ground, and is accordingly
iu touch with the postulates of the existing property arrangements tu
that extent. It is a more unui itigated working ont of the same postu-
lates. It is a system of " natural liberty " unqualified to the extent
even of not admitting prtscriptivi: <>wiiti-:iliip. Iu hssis is » (divinely

KtlVlUZATION AND TK£ MACHINE I'ROCESS 339

I envy, class hatred, discontent with, their own
; by comparison with that of others, and to a
Ksniataken view of theii' own interests. This eriti-
Icisra may be well enough as far as it goes, but
' it does not touch socialism in those respects in
which it differs from other movements into which
this range of motives enters; that is to say, it
touches, not the specific traits of socialism, but
the common features of popular discontent. His-
tory shows many such movements of discontent,
pushed on by real or fancied privation and in-
iquity ; and past experience recorded in history
should lead us to expect that, under the guidance

Inatltated) order of nature, the keynote of which is an inalienable free-
dom and equality of the indtrlduat. quite in the eighteentli -century
■pirlt. It Ls in this sense an oSehoot of the Romantic BCbool ol thought.
AnarcblBm is a iff jure scheme, irtiich takes no account of mechanical
exigencies but rcetit ita case altogether on anthropomorphic postulatea
of natural rights. It la, from the natural-righis standpoint, aubetan-
tially aound, tbough Henaeiessly eitreme.

What may be called the normal socialism, nocialism of the later,
e dangerous, and more perplexiug, Uad, does not build on Uio
oeired metaphysical basis of the "natural order." It deniands a
tion of the social fabric, but it doea not know on what lines
truction ia to be carried out. The natural rights of the indi-
vidual are not accepted as the standard (except by certain large bodira
of neophytea, especially rural American, who are carrying under social-
iit mottoea the burden of auimosities and preconceptions that once
made populism), but nothing definite is put in the place of this out-
worn standard. The socialists of the line, in so far as there is any
caoaenstis among them, profess that the mechanical exigencies of the
Industrial system roust decide what the social structure is to be, but
btyond Uiia vague generality they have little to offer. And this
mechanical alandardlzalion can nianife«tly aCFord no baaia tor legia-
btlon on civil rights. Indeed, it is difficult to see how any scheme

Chta, much or little, can find a place in a socialistic reorjtao-

^f neoi

340 THE THEORY OF BUSINESS ENTEHFBISE

of such motiveB and such reasoning as is currently
imputed to the socialists by their conservative
critics, the malcontents would demand a redistri-
bution of property, a reorganization of ownership
on such new lines as would favor the discontented
classes. But such is not the tread of socialistic
thinking. It looks to the disappearance of prop-
erty rights rather than their redistribution. The
entire range of doctrines covered by the theory of
distribution in the received economics is essen-
tially (and characteristically) neglected bj the
modern socialist speculations.'

The perplexity of those who protest against a
supposedly imminent socialistic subversion of prop-
erty rights is of a twofold kind: (1) The absence
of proprietary rights is incomprehensible, and a
living together in society without defined owner-
ship of the means of living is held to be imprac-
ticable ; ownership of goods, in the apprehension of

I The " Bcientific socialism " of Marx and Engels a
during tlie third quaner of the nineteenth century was Dot of thi«
negative character. It was a product ot HegelianiHm blended with the
conceptionB of nHturai righta, its chief count being the " claim to the
full product of labor." This soclaliBin never made serious inroadi
among the vrorking claasea outaide of Ciertoany — the home of Hege-
llanism. Even in that country the most vigorous growth of socialistic
Hentiment came after Hogi^lianlBm had begun to yield to Darwinian
methods of thought, and this later growth has been progressively lem
Marxian and less pogltlve. Marxism is now llttla more than a pro
/orma conlession of faith. Avowed soeialisui is practically taking on
the cbatacter described above, except so far as It has grown oppor-
tonlBt and has sought afBliaiion with the liberal democratic mnvem.?ni
and the reformers.

VILIZATIOX AND THE MACHINE PROCESS 341

fce conserrative critics, is involved in the presence
(2) Ownership of the means of living
I an inalienable right of man, ethically inevitable ;
he cancelmeut of property rights is felt to violate
. fundamental principle of morals. All this, of
ourse, proceeds on the assumption that the insti-
tution of ownership cannot be abrogated, as being
an elemental function of human nature and an
integral factor in the order of things in which
human life belongs.

To the modern socialist all this is coming to be
1 and less convincing. In this respect there is
fairly well marked progressive change in the
attitude of the professed socialists. Their position
is progressively less capable of being formulated as
a business proposition ; their demands are progres-
■aively more difficult to state in the form of a
jecuniary claim. The claim to the full product of
'^ labor, which once filled a large place in socialistic
clamors and had a great carrying force during the
earlier three-quarters of the nineteenth century,
las gradually fallen into abeyance, both with the
jitators and the adherents of the propaganda,
during the last generation. To-day this claim is
an afterthought in the advocate's presentation of
socialism, more frequently than it is a point of
departure for the argument, and it is made more
of by the proselytes, who have carried the meta-

Kysics of it over from the current common sense
_

a Di

Leive

ppeci

labo

clan

»earli(
has
"gits

343 THE THEORY OF BUSINESS ENTERPRISE

of the buainesB community, than by the Bocialists
of coufirmed standing. The claim to the full prod-
uct is an article of natural-rights dogma, and aa
such it is a reminiscence of the institutional situa-
tion from which socialism departs, rather than a
feature of the prospective situation to which social-
istic sentiment looks.

The like obsolescence of the sense of equity
in ownership is visible in the attitude taken by
strikers in the large, mechanically organized indus-
tries, outside of the ranks of avowed socialism.
These strikers are less and less deterred by consid-
erations of vested rights, property rights, owner's
interests, and the like. The principle that a man
may do what he will with his own is losing its
binding force with large classes in the community,
apparently because the spiritual ground on which
rests the notion of " his own " is being cut away
by the latter-day experience of these classes.
Abridgment of proprietary discretion, confiscation
of proprietary rights, is growing gradually less
repugnant to the industrial populace ; and the
question of indemnity for eventual loss is more and
more falling into neglect. With the socialistic
element the question is not, what shall be done in
the way of readjustment of property claims, but
what is to be done to abolish them.'

' Where members of Uie WBll-tcvdo classes avow socialislic senti'
nU Bnd idpfilH U t'oninumly luniBoutt') be a mpi'el]p hamanitkriui

I Civilization and the machine process 343
1 The question of eqiiit._y or inequity in the distribu-
tion of wealth presumes the validity of ownership
rights on Bome basis or other, or at least it presumes
the vahdity of some basis on which the claims of
ownership may be discussed. Ownership ia the
major premise of any argument as to the equity
of distribution, and it is this major premise that is
being forgotten by tlie classes among whom social-
istic sentiment is gaining. Equity in this connec-
tion seems not to belong in the repertory of
socialist concepts. It is at this point — the point
of a common ground of argument — that the dis-
crepancy occiu-s which stands in the way, not only
of an eventual agreement between the sociahsts
and their conservative critics, but even of their
meeting one another's reasoning with any substan-
tial effect. In the equipment of common-sense
ideas on the basis of which the conservatives
reason on this matter, there is included the con-
ventional article of ownership, as a prime fact ; in
the common-sense basis of socialistic thinking this
■BOnventional premise has no secure place. There

MplralJon for a more "equitable" redlatrlbulion of wealth, a re-
adjuBtmeut of the scheme of owneTsbip with some improTed ^e-
Boarding of Ihe "reaaonable" property claimB of all members of the
community. What "sodaliat " reform comrnonly meauB to tbii con-
tlngeot of well-to-do iiregulare Is soDie Kheme of eqit&l rights of
ownership for all. Whereas to locialists of the line equal right! of
ownerahip ia as idle a proposition as an equal right of citizens
Uieir votes. Instead of a refonn of owneiship the socialists conlf ni'
Iracetese disappearance of ownership.

^Ljdate the trace

344 THE THEORY OF BUSINESS ENTERPRISE

is, therefore, a discrepancy in respect of the meta-
physics underlying the knowledge and reasoning
of the two parties to the controversy, and the out-
look for a common understanding is accordingly
vain. No substantial agreement upon a point of
knowledge or conviction is possible between persons
who proceed from disparate preconceptions.

Still the conservative reformers and the icono-
clasts have a good deal in common. The prevalent
habit of mind of both classes is a hybrid product
of conventional principles and matter-of-fact in-
sight. But these two contrasted grounds of opinion
and aspiration are present in unequal degrees in
the two contrasted classes ; in the conservatives
the conventional grounds of finality dominate and
bear down the matternaf-faflt knowledge of things,
while the converse is true of the iconoclasts. Con-
trasted with earlier times and other cultural
regions the consensus, the general drift, of the
modern Western culture as a whole is of an icon*
Qclastic character; while the class contrast here
in question lies only within the range of this West-
ern cultural consensus. As one or the other of the
two contrasted proclivities — recourse to conven-
tional precedents and recourse to matter-of-fact
insight — gains and overbalances the other, the gen-
eral cultural movement will drift toward a more
conservative (archaic), conventional position ot

CIVILIZATION AND THE MACHINE PROCESS 345

toward a more iconoclastic, materialistic position.
During modem times the cultural drift has set in
the latter directiou. With due but not large ex-
ceptions, the effective body of the modem popula-
tion has been growing more matter-of-fact in their
thinking, less romantic, less idealistic in their
aspirations, less bound by metaphysical considera-
tions in their view of human relations, less man-
nerly, leas devout.

The discrepancy between the conservatives and
the iconoclasts need not be taken to mean that the
two contrasted classes are moving in opposite
directions, nor even in widely divergent directions.
Neither class can properly be said to be reactionary.*
Taken generally, both wings have been moving
in the direction of a more impersonal, more matter-
of-fact, less conventional point of view. In this
composite cultural growth the matter-of-fact habit
of mind has on the whole been gaining at the
expense of the conventional, and the conventional
premises that have been retained have also come
to bear more of a matter-of-fact character, — as,
e.g., in the supersession of feudalistic or theocratic
principles of law by natural rights. So that the
position for which the effective body of conserva-
tives now stand is not in substance a very archaic
one. It is a more matter-of-fact position, less

■ Unless it be in tbe latest extremes ol conserr&tum, such m ia
■hown In the receuL success of dymtsUc politics In Germuiy, Tory
policy in En({laiid, jinl t>r<'iJ;tlor; poUUcSil ideals in America.

346 THE THEORY OF BUSINESS ENTERPKISE

closely bound by authentic conventions, than the
position effectively occupied by the iconodafltic
wing a hundred years ago.

Throughout the modern cultural complex there
is a somewhat variable, scattering shifting of
ground to a more matter-of-fact basis. The direc-
tion of spiritual growtli or change is much the
same throughout the general body of the popula-
tion ; but the rate of change, the rate at which
matter-of-fact ideals are superseding ideals of con-
ventional authenticity, is not the same for all
classes. Hence the class discrepancy here spoken
of. The coefficient of change is so much larger
in the vulgar, industrial classes as progressively
to widen the cultural interval between them and
the conservatives in the respect which is here in
question. And the resulting discrepancy of insti-
tutional aims and ideals may have none the less
serious consequences for being due to a differential
rate of movement rather than to a divergent cul-
tural trend.

Tn this differential rate of movement the de-
parture from the ancient landmarks has now gone
80 far (or is reaching such a point) among the
socialistic vulgar as to place their thinking sub-
stantially on a plane of material matter of fact,
particularly as regards economic institutions.
Whereas in the conservative classes the chai^
ifl not yet large enough to take them off the plane

,I2ATI0N AND THE MACHINE PttOCESS 347

[ received conTentional truth, particularly as re-
gards economic institutions and such social ques-
tions as are of an economic complexion. In the
case of the former this change in habit of mind
has been bo considerable as, in effect, to constitute
a change in kind ; cnide matter of fact has come
to be the dominant note of their attitude, and con-
ventional authenticity has been relegated to a sub-
sidiary place ; that is to say, the change is of a
revolutionary character. In the case of the con-
servative classes, so far as touches the institutional
notions here under inquiry^ the corresponding
change has not yet gone so far as to amount to
a change in kind j it is not of a revolutionary
nature. The views current among the respectable
classes on these matters still, in effect, run on the
ancient levels on which were built up the pecun-
iary institutions about which the controversy
circles. For the present there need be no appre-
hension that the more respectable classes will
reach a mature revolutionary frame of mind. The
discipline of their daily life does not, on the whole,
favor such a result.

This, in substance, is also the view taken by
the socialistic revolutionaries, particularly by those
that are of Marxian antecedents. It is a point
of conviction with them, though not wholly of
reasoned conviction, that the socialistic movement
H^ in the nature of the case, a proletarian move-

348 THE THEOKY OF BUSINESS ENTEBPRISII

ment, in which the respectable, that is to say the
pecuniarily competent, classes can have no organic
part even if they try. It is held, in effect, that
the well-to^io are, by force of their economic cu^
cumstances, incapable of assimilating the socialist
ideas. The argument here set forth may serve
to enforce this view, but with a difference. In-
stead of contrasting the well-to-do with the indi-
gent, the line of demarcation between those avail-
able for the socialist propaganda and those not
so available is rather to be drawn between the
classes employed in the industrial and those em-
ployed in the pecuniary occupations. It is a ques-
tion not so much of possessions as of employments;
not of relative wealth, but of work. It is a ques-
tion of work because it is a question of habits of
thought, and work shapes the habits of thought.
The socialists themselves construe the distinction
to be a distinction in respect of habits of thought;
and habits of thought are made by habits of life
rather than by a legal relation to accumulated
goods. This legal relation may count materially
in shaping the animus of the several economic
classes; but it appears not to be competent of
itself to explain the limitations observable in the
spread of socialistic sentiment.

The socialistic di.iaffection shows a curious ten-
dency to overrun certain classes and to miss cep
tain others. The men in the skilled mechanical

tILIZATION AND THE MACHINE FROCESS 349
ies are peculiarly liable to it, while at the
extreme of immunity ia probably the profession
of the law. Bankers and other like classes of
business men, together with clergymen and politi-
cians, are also to be held free of serious aspersion ;
similarly, the great body of the rural population
are immune, including the population of the coun-
try towns, and in an eminent degree the amall
fanners of the remoter country districts ' ; so also
the delinquent classes of the cities and the popu-
lace of half-civilized and barbarous countries. The
body of unskilled laborers, especially those not
afisociated witii the men in the skilled mechanical
trades, are not seriously affected. The centres
of socialistic disaffection are the more important
industrial towns, and the effective nucleus of the
socialistic malcontents is made up of the more intel-
ligent body of workmen in the highly organized
and apeciaUzed industries. Not that socialism
does not spread in virulent form outside this
narrow range, but at a farther remove from the
centre of dispersion it appears rather sporadically
and uncertainly, while within this field it is fairly
endemic. As regards the educated classes, social-
istic views are particularly likely to crop out
among the men in the material sciences.

> Socialistic notione are apparently ntakiug some inroadH atnoug Uie
nml popnlfttion of the American prairie region, wbere a uiechauically
orguiked and Btai.darcllzeil meUiod of [anning prevails, with a large
tt*e of niecluuilcal ^ppUaacea.

3oO THK THEORY OF BUSINESS ENTERPRISE

The advocates of the new creed have made
little headway among the rural classes of Europe,
whether peasant fanners or farm laborers. The
rural proletariat has hitherto proved virtual))'
impermeable.' The discipline of their daily life
leaves their spirit imdisturbed on the plane of
conventionality and anthropomorphism, and the
changes to which they aspire lie within the scope
of the conventionalities which have grown out of
these circumstances of their life aiid which express
the habit of mind enforced by these circumstances.

Without claiming that this explanation is com-
petent to cover the case of sociaUsm in all its bear-
ings, it may be pointed out that this socialistic bias
has effectively spread among the people only within
the last quarter of a century, which is also approx-
imately the period since which the machine process
and the mechanical standardization of industry has
reached its fuller development, both aa regards the
extent of its field and aa regards the extent of its
technological requirements ; that it is foimd in vig-
orous growth only in those communities and partic-

■ So striking has been the failure of the German eoclalista, for
insUuice, in their atUmpls apon the integrity of Ihe [afming oommu-
nlt;, that they have Utterly chtnged their tactics, and instead ol sv
tempting to convert the peaaaDts to a [iili sociaiistic prograinine, tlwy
have lamed to measurea of compromise, in which the charaGtaristi*
and reToitttionary features of the sociaiistic programme are softened
beyond recognition, if not suppressed. Tlie habits of life, and Uierefon
the habits of thought, of the peasant fartneta move on the andent
levels of handicraft, pecuniary management, pergonal eooaeqaeiioe,
and prescriptive custom.

BciVlLIZATION iND THE MACHINE PROCESS 301

■ularly among tliose classes whose life is closely
^- regulated by the machine technology ; and that the
discipline of this machine technology is peculiarly
designed to inculcate such iconoclastic habits of
thought as come to a head in the socialistic bias.
Socialism, in so far as the term means the subver-
sion of the economic foundations of modern culture,
occurs only sporadically and dubiously outside the
limits, in time and space, of the discipline of the
machine technology. While among those classes
whose everyday life schools them to do their habit-
ual serious thinking in terms of material cause and
effect, the preconceptions of ownership are appar-
ently becoming obsolescent through disuse and
through supersession by other methods of appre-
hending things.'

^h > If Ulis iccount of the vlaaa limtlatfon of tbe socialist blu ia u-
^Bwvted, it haa an Imitieitlate bearing upon a queatlou n-hich is Utterly
H^ Sigaging the atuntion ol the advocates of socialiaiu. The qarstioD
ia aa to the part played by properlyltw« ofBce employeea and by tbe
boBinen men whom tbe moile.rn conBolidationa of business reduce to
the position of salaried managers and auperintendente. With a faith
prompted by their owji hopes rather than by obsen'od facts or by tlie
logic of events, tbe spokesmen for norialism are strongly inclined to
claim this " business protetitriai '' at a contingent which the oourse of
economic (tevelopnient is bound to throw into tbe socialist camp.
The facta do not in nny appreciable degree countenance such an ei-
pectation. Tbe unpropertled classen employed iu business do not
take to aociatlstic Tagaries nlth sucb alacrity as should inspire a con-
fident bope in tbe advocates of socialism or a serious apprehension
in those who stand for law and order. Tbis pecuniarily diafrwichiied
busineae population, in its revulsion against unassimlUted facts, turns
nthei to some excursion into pragmatic romance, such as Social Settle-

CProUbttion, Clean Politics, Single Tax, Ana and Crafts,
tbood Ouilda, iDsUtuUonal Church, Christian Science, New

352 THE THEORY OF BUSIKESS ENTEKPBISE

But the machine technology not only trains the
workmen into materialistic iconoclasm, It haa also
a selective effect. Persona endowed with propensi-
ties and aptitudes of a materialistic, matter-of-fact
kind are drafted into the mechanical employments,
and such are also peculiarly available socialistic
material. Aptitude for the matter-of-fact work of
the machine technology means, in a general way,
ineptitude for an uncritical acceptance of institu-
tional truths. It is probable, therefore, that the
apparent facility with which the mechanical em-
ployments (and the material sciences) induce a
socialistic or iconoclastic bent is to be set down in
part to the fact that the human material in these
employments is picked material, peculiarly amen-

TboQgtt, or aome aach cultural thimblerig. Tbe work of the cap.
tftin of induatrj in cunaillng the range of indiTJdual diacretiQn in
bnainesa and in reducing the lesser undertakers to the rank of clerka
and Bubalterna need not be looked upon aa unavoidably funherlng
the spread of the socialiatic bias, except In so far as the change results
In thniwlDg the men affected by it out of the pecuniaty or buaiiiras
occupations and aubjeoting them to the discipline of the mechanical
industry. At Uie moat, apparently, the change from an independent
to a dependent hualneas llfn aerrea to weaken the men's interest In
the question of property ; it does not appear that it throws them into
an attitude of substantial diatmst or iconoclasm. Their interest tn
this particular institution slackens through the loss of that emulative
motive on which pecuniary endeavor proceeds, but their faitb In its
Intrinsic fitness is not thereby shaken, nor are liey thrown Into the
nuika of the chronic dissentients The training given by their 11(«
continues prevailingly to run on conventional grounds ; that is w say,
on grounds of legal relation, solvency, and the like. Accountant and
office employees are nearly aa conservative as clergymen and tawyeis,
and their being so is apparently due to the fact that their expetienoB
runs on much the same ground of conventional Bnalitj.

ProvaiZATION A^D THE MACHINE PROCESS 353

able to this discipline. There is a sifting of the
working classes, whereby the socialistic and me-
chanically capable are roughly segregated out from
the rest and subjected to the iconoclastic discipline
of the mechanical employments and raatternDf-fact
thinking; while the residue, which is on the whole
made up of the persons that are relatively least
capable of revolutionary socialism, is at the same
time less exposed to the discipline that might fit
them for the socialistic movement. This sifting is,
of course, a rough one, and leaves many exceptions
both ways.

In the light of this consideration, then, it is to
be noted : (1) that the dominance of the machine
process in modern industry is not so potent a factor
for the inculcation of socialistic notions — it does
not so irresistibly shape men's habit of mind in the
socialistic sense — as the first survey of the facta
would suggest; and (2) that the differentiation of
occupations involved In modem industrial methods
selectively bunches the socialistic elements together,
and 80 heightens their sense of class solidarity and
acts to accentuate their bias, gives consistency to
their ideals, and induces that boldness of convic-
tion and action which is to be had only In a com-
pact body of men.

But in either case, whether the visible outcome
is chiefly due to their selective or to their discipli-
«ry effect, the bearing of the industrial occupations

354 THE THKOKY 0¥ BUSINESS ENTERPRISE

upon the growth of socialism seems equally close
and undeniable. The two modes of influence seem
to converge to the outcome indicated above, and
for the purpose of the present inquiry a detailed
tracing out of the two strands of sequence in the
case neither can nor need be undertaken.'

With such generality as commonly holds in
statements of this kind, it may be said that the
modem socialistic disaffection is loosely bound up
with the machine industry — spreading where this
industry spreads aud flourishing where this indus-

' Connected with lliia apparent selective action which the modem
specialization of occupatiODs exerts, there is a Further, and at first sight
more singular, point of disparity between the BociaUsla and the eon-
fiervatives ; and this difference hae also a curious correlation with the
distribution of the machine industry. In a degree, — slight and uncer-
tain, perhapa, but scarcely to be mistaken, — the sociatists and the
conservatives are apparently of diAerent racial antecedents. It has
been seen above that the propaganda is most vital and widespread in
the Industrial towns, ba cuntrOHted with the agriculttu^ country. Sut
if the researehes of such students as Ainmon, Ripley, Lapouge, Clos-
Bon, and othera that might be named, are taken at their face value, it
appears that the towns differ perceptibly frou the open oountry in
point of race ; and that the migration from the country into the indus-
trial towns has a selective effect of such a kind that a larger propor-
tion of one racial stock than of another resorts to the towns. The
towns, in those countries where data are available, show a larger
admixture of the dolicho-blond Etocb than the open country. This
seems lo argue that the dolicbo-hloud stock, or the racial mixture ol
the towns in which there is a relatively large admixture of tlie dolicho-
blond, is perceptibly more efficient in the machine induatriea, more
readily iuoliced to think lu malerialisUc temu, mora given to radical
innovation, less bound by convention and prescription. This generali-
zation Is stren^ened by the fact that tbe more doUcho-blond regions
are also, on the whole, more socialistic than those in which this ele-
ment is less iu evidence. At the same time they are industrially in
advance of the lBti«r In the matter of machine industry ; and they are
also l*ri>teatant (irreligious) rather than Catholic.

' CmLIZATION AMU IHE MACIIIHE PROCESS 355

try gives the dominant note of life. The correla-
tion between the two phenomena is of such a kind
as to leave uo doubt that they are causally con-
nected ; which means either that the machine in-
diistry, directly or indirectly, gives rise to socialism,
or that the two are expressions of the same com-
plex of causes. The former statement probably
expresses the truth of the case in great part, but
the latter need not therefore be false. Wherever
and in ao far as the increase and diffusion of knowl-
edge has made the machine process and the me-
chanical technology the tone-giving factor in men's
scheme of thought, there modem socialistic icono-
clasm follows by easy consequence.

The socialistic bias primarily touches economic
institutions proper. But that is not the whole of
it. When the term is used without modifying
phrase it carries a certain implication touching
otlier than primarily economic matters. The po-
litical bias of this unmitigated socialism is always
radically democratic, to the extent that these social-
ists are in a high degree intolerant of any monarch-
ical, aristocratic, or other prescriptive government.
The state is doomed in the socialistic view.' The

■ Tbla, of coone, doea not bold for the Inoffensive pMudo-tocIftUstla
divenions set alool by various well-niaaiiing politicians and clerg;-
ineD, Itnown by Tarioon qualifying deslgnatloiin, such u '■ Stale,"
"Cbrlstlui," "Catbolic," etc.. and designed to act as correctlTM at
the socialistic dLtteinpf r.

356 THE THEOKY OF BUSINESS ENTERPRISE

socialist antagonism to the state takes Yariou.<<
forms and goes to varying degrees of intemperance,
but it is consistently negative. Except in their
destructively hostile attitude to existing political
organizations, the socialists have nothing consist-
ent to offer on the head of political institutions, less,
indeed, latterly than in the earlier days of the
propaganda. There seems to be a growing shiftr
lessness of opinion on this head ; one gets the im-
pression that the sense of the socialist malcontents,
as near as it may be permisaible to use that word
in this connection, is that the community can best
get along without political institutions.

There is a like departure from the ancient norms
touching domestic relations. This is not confined
to those portions of the community that avowedly af-
fect socialistic views, although it has, on the whole,
gone farthest among the classes among whom the
socialistic views prevail. There is a visible weak-
ening of the family ties, a disintegration of the
conventions of household life, throughout large
classes. The defection is even felt, by sensitive
and solicitous persons, to be of such grave propor-
tions as to threaten the foundations of domestic
life and morality. This disintegration of the fam-
ily ties shows itself most alarmingly among the
socialistic classes, with whom it all wears such an
air of unconcern as argues that in this respect
they are incorrigible. To these the conventional

nUZATlON AND THE MACHINE PROCESS 357

. of the household has in good part ceased to
_^j._al as somethiug sacred. It is no longer one of
their eecure spiritual aasets.

"What appears to be in jeopardy, should this so-
Lcialistic defection gain ground, is the headship of
^Bkbe male in the household economy. The family,
~ as it has come down from the mediaeval past, under
the shelter of the church, is of a patriarchal consti-
tution, at least in theory. The man has been vested
with discretionary control in domestic affairs. In
the earlier days his discretion was very direct and
full, comprising corporal coercion. Latterly, after
and so far as mastery and servitude have passed off
the field and natural rights have come to rule, this
direct coercive control has been superseded by a
pecuniary discretion; so that the male head of the
household is alone competent to exercise a proprie-
tary control of household affairs. This latter-day
conventional headship of the man is now in its turn
beginning to lose the respect of a good share of the
populace. The disintegration of the patriarchal

^feadition has gone farthest among those industrial
classes who are at the same time inclined to so-
cialistic views.

At this point in the institutional structure, as
well as at other points where the industrial classes
f »re giving evidence of a loss of spiritual ground,
|Uiere is little indication of a constructive movement
ward nny specifii"- :irr:intrpnienf. to take the place

358 THE THEORY OF BUSINESS ENTERPRISE

of the institutioQ whose existence is threatened.
There is a loosening of the bonda, a weakening of
conviction as to the full truth and beauty of the
received domestic institutions, without much of a
consensus as to what is to be done about it, if any-
thing. In this, as at other junctures of a similar
kind, the mechanically employed classes, trained to
matter-of-fact habits of thought., show a notable
lack of spontaneity in the construction of new
myths or conventions as well as in the reconstruc-
tion of the old.

All this disintegration of the spiritual founda-
tions of our domestic institutions spreads with the
most telling effect, because most heedlessly, among
the population of the industrial towns. But it
spreads also outside the limits of the Industrial
classes ; for the habits of life and of thought in-
culcated by the machine technology are not limited
to them, even if these classes are the ones who
suffer most and most severely from the machine
discipline. The disintegration shows itself, in vary-
ing degree, in all modern industrial communities,
and it is visible somewhat in proportion as the
community is modem and industrial. The mar
chine is a leveller, a vulgarizer, whose end seems
to be the extirpation of all that is respectable, noble,
and dignified iu human intercourse and ideals.

What happens within the narrow range of the
institutions of domes^o life repeats itself in sub-

IrCIVILIZATION AND THE MACHINE PROCESS 359

stance in the larger field of national life and ideals.
Fealty to a superior installed by law or custom
suffers under the discipline of a life which, as re-
gards its most formative exigencies, is not guided
by conventional grounds of validity. And the
■ansmuted form of fealty called patriotism is in
nuch the same insecure case. The new ground of
solidarity and antagonism, for which these
'extreme spokesmen of the industrial regime stand,
is neither ecclesiastic, dynastic, territorial, nor lin-
guistic ; it is industrial and materialistic. But in
their attitude of heedlessness toward the dynastic
and national conventions the socialists are merely
the extreme exponents of the spirit of the age in
Kibe modem industrial communities.
^B So, again, as regards the religious life. Men
^nrained by the mechanical occupations to material-
^Hstic, industrial habits of thought are beset with a
"■ growing inability to appreciate, or even to appre-
hend, the meaning of religious appeals that pro-
ceed on the old-fashioned grounds of metaphysical
validity. The consolations of a personal relation
(of subservience) to a supernatural master do not
appeal to men whose habit of life is shaped by a
familiarity with the relations of impersonal cause and
effect, rather than by relations of personal dominance
1 fealty. It does not come as a matter of course
such men to give the catechism's answer to
he question, What is the chief end of man.? Nor

360 THE THEORY OF BUSINESS ENTERPE18E

do the; instinctively feel themselves to be Biunera
by virtue of a congenital, hereditary taint or ob-
liquity. Indeed, they can only with great difBcul^
be seriously persuaded that they are sinners at all.
They are in danger of losing the point of view of
sin. The relation of status or fealty involved in
the concept of sin is becoming alien to their habit
of mind- They are therefore slow to reahze that
their past life has violated such a relation of fealty,
on the one hand, and that it is of vital consequence
to reestablish such a relation of status by a work
of salvation or redemption. The kindly ministra-
tions of the church and the clergy grate on the
sensibilities of men so trained, as being so much
ado about nothing. The machine, their master,
is no respecter of persons and knows neither
morality nor dignity nor prescriptive right, divina
or human ; its teaching is training them into in-
sensibility of the whole range of concepts on which
these ministrations proceed.'

Not alone in the direction of growth given to
vulgar sentiment and to the vulgar insight into
facts is the matter-of-fact discipline of the machine
technology apparent, but also in the scope and

' The cultanJ era of Natural RighCft, Natural Llber^, and Natoial
Religion reduced God to the rank of a, ■' Great Artificer," and the
machine technology \a, in turn, relegating Uiin to that fringe ol minor
employmentH and those outlftng induslrial rpginns lo which tlie handt-
craftemen have been retired.

CIVILIZATION AND THE MACHINE PROCESS 361

method of that scientific knowledge that has had
the vogue since the advent of the machine indus-
try. Scientific inquiry is directed to a different
end and carried out under the guidance of a differ-
ent range of principles or preconceptions in the
modem industrial communities than in earlier
days or in cultural centres lying outside the
machine's dominion. Modem science is single-
minded in its pursuit of impersonal relations of
causal sequence in the phenomena with which
it is occupied.

The line of descent of this matter-of-fact modem
science is essentially British, as is that of the
machine technology and of the characteristically
modern civil and pohtical institutions. It is true,
beginnings of the modem scientific movement were
made in Italy in the days of the Renaissance, and
Central Europe had its share in the enlightenment ;
but these early modern risings of the scientific
spirit presently ran into the sand, when war,
politics, and religion reasserted their sway in the
south of Europe. Similar tentative stirrings of
matterof-fact thought were had in Spain and
France before and during the early phases of the
state-making era ; but here, again, war and politics
rendered these onsets neariy nugatory, so that the
intellectual output was more speculation than
science. In the Low Countries something similar
holds trae, with a larger qualification. The Brit-

362 THE THEORY OK BUSINESS ENTERPRISE

Uh community mode a later and slower start,
coming out of barbarism at a later date and with
a heavier handicap of physical obstructions. But
being, relatively, sheltered from war and politics,
the British were able to take up the fund of scien-
tific gains made by the South-European men of
workday insight, to turn it to account and to
carry it over the era of state-making and so pre-
pare the way for the modern scientific, techno-

Of course, nothing but the most meagre and
sketchiest outline of this matter is practicable in
this place, and even that only in its relation to the
machine industry during the past one hundred
years or so. What is said above of the British
lead in modem science may perhaps be questioned,
and it is not necessary for the present purpose to
insist on its truth ; but so much seems beyond
hazard as that the lead in the material sciences lay
with the British through the early machine age,
and that the provenance of this modem scientific
research to-day does not extend, in any pronounced
degree, beyond those communities that He within
the area of the modem machine industry.

In time and space the prevalence of the modem
materialistic science is roughly coextensive with
that of the machine process. It is, no doubt, re-
lated to it both as cause and as eCEect ; but that ita
relation to modem industry is more that of effect

tLIZATlOX AND THE MACHINE PROCESS 363
cause seems at least broadly sugg^ted by the
aecay which presently overtook scientific research,
e.g., in the south of Europe when those peoples
turned theii- attention from material to spiritual
^H and political affairs.'

^P What is of immediate interest is the change
that has come over the scope and method of scien-
tific research since the dominance of the machine
(process, in comparison with what preceded the
coming of the machine age. The beginnings of
modem science are older than the industrial revo-
lution ; the principles of scientific research (causal
explanation and exact measurement) antedate the
regime of the machine process. But a change has
taken place in the postulates and animus of scien-
tific researcii since modern science first began, and
^m this change in the postulates of scientific knowledge
^B is related to the growth of the machine technology.
^m It is unnecessary here to hark back to that
^M scholastic science or philosophy that served as an
^B intellectual expression of the ecclesiastical and
H political cultiu^ of the Middle Ages. Its character,
^P as compared with later science, is sufficiently no-
^B toriouB. By the change from scholastic knowledge
^1 to modem science, to the extent to which the
change was carried through, the principle (habit of

1 There is a Bimiiar Hu^estJou in the relative (aliglit but percep-
tible) decline of Hclentitic animiu In England since the Engtlah onni-
■/nonitj' hu turned its ntt«Dt1on and aspiratiniis U) imperialistic lealn
it proneM mora than to industrial niatttrrs.

364 THE THEORY OK BUSINESS ENTERPRISE

mind) of adequate cause was substituted for that
of sufficient reason. The law of causation as it is
found at work, in the maturer science of the
eighteenth and early nineteenth centuries, com-
prises two distinguishable postulates: (1) equality
(quantitative equivalence) of cause and effect ; and
("2,) similarity (qualitative equivalence) of cause and
effect. The former may, without forcing it, be
referred to commercial accountancy as its analogue
in practical life and as the probable cultural
ground out of which the habit of insisting on an
inviolable quantitative equivalence gathered con-
sistency. The ascendancy of the latter seems in a
similar manner to be referable to the prevalence
of handicraft as its cultural ground. Stated nega-
tively, it asserts that nothing appears in the effect
but what was contained in the cause, in a manner
which suggests the rule that nothing appears in
the product of handicraft but \vhat was present in
the skill of the artificer. " Natural causes, " which
are made much of in this middle period of modem
science, are conceived to work according to certain
" natural laws." These natural laws, laws of the
" normal course " of things, are felt to tend to a
rational end and to have something of a coercive
force. So that Nature makes no mistakes, Nature
does nothing in vain, Nature takes the most eco-
nomical course to its end. Nature makes no jumps,
etc. Under this law of :

iw of natural causation ever; ■

11 I

IhCivllization and the machine process 365

'fiffect muBt have a cause which resembles it in
the particular respect which claims the iaquirer'a
attention. Amoug other consequences of this view
it follows thatj since the details as well as the
whole of the material universe are construed to
show adaptation to a preconceived end, this " nat-
ural order" of things must be the outcome of
preexistent design residing in the " first cause,"
■which is postulated by virtue of tliis imputed de-
sign and Ls designated the "Great Artificer."
There is an element of conation in this original
modem postulate of cause and effect. The shadow
of the artificer, with his intelligence and manual
skill, is forever in the background of the concepts
of natural law. The " cause " dealt with in a given

I case is not thought of as an effect ; and the effect is
treated as a finality, not as a phase of a complex
eequence of causation, When such a sequence is
under inquiry, as in the earlier, pre-Darwinian theo-
ries of evolution, it is not handled as a cumulative
sequence whose character may blindly change from
better to worse, or conversely, at any point ; but
rather as an unfolding of a certain prime cause in

» which is contained, implicitly, all that presently
appears in explicit form.

In the conception of the causal relation as it
may be seen at work a hundred yeara ago, cause
and effect are felt to stand over against one an-
other, so that the cause controls, detemiint's tlip

366 THE THEOBV OF BUSINESS ENTERPRISE

effect by transmitting its own character to it. The
cause ia the producer, the effect the product. Rela-
tively little emphasis or interest falU upon the
process out of whicli the product emerges ; the in-
terest being centred upon the latter and its rela-
tion to the efficient cause out of which it has come.
The theories constructed under the guidance of this
conception are generalizations as to an equivalence
between the producing cause and the effect-product.
Tlie cause " makes " the effect, in much the same
sense as the craftsman is apprehended to make the
article on which he b engaged. There is a felt
distinction between the cause and the environing
L'ircumstances, much as there is between the work-
man on the one hand and his tools and materials oq
the other hand. The intervening process is simply
the manner of functioning of the efficient cause,
much as the workman's work is the functioning of
the workman ia the interval between the inception
and the completion of the product. The effect is sub-
sequent to the cause, as the workman's product is
subsequent to and consequent upon his putting forth
his productive efficiency. It is a relation of before
and after, in which the process comes in for atten-
tion as covering and accounting for the time interval
which, in analogy with workmanUke endeavor, is
required for the functioning of the efficient cause.'

' Compare, bomrer, Sombart, KapitalitmuB, especUlly toL I.
eh. Vm and XV. Sombart finds the mi>den) KientiUc conoepi ul

ILIZATION AND THK MACHINE PROCESS 367

But as time passes and habituation to the
(xigencies of the machine technology gains in
range and consistency, the quasi-personal, handi-
craft conception of causation decays, — first and
most notably in those material, inorganic sciences
that stand in the closest relation to the mecliani-
cal technology, but presently also in the organic
sciences, and even in the moral sciences. The ma-
chine technology is a mechanical or material process,
and requires the attention to be centred upon this
process and the exigencies of the process. In such
a process no one factor stands out as unequivocally
the efficient cause in the case, whose personal chai--

cauae and effect to be eaaenUally an outeonie of the diacipliiie of ac-
countancy pnforceii by businees traffic. So thai he maVPS bunineiM
euierpiiae rather than mecbanicftl Industry accountable for the riae
of modem science atid for the matter-of-fact character which diaUn-
l^iahes thif HCience. In thin view there la, no doubt, a larf^e and
Tahuble element of truth. To the end of a mathematical formalation
of caiisnl phenomena aa well as a tenacioua graap of the principle of
qoantitatlTP equivalenci", the accountancy enforced by tbp petty trade
of early modeni times, as well aa by commercial Crafllc proper, ap-
peara to hnve given the most effective training. In ao far as tbii
element of quantJtatiTe equivalence, aimply. has dominated the
grovib of science, It has given, as its moat perfect product, PoaiUvism.
Foaitlvism flourished al its best and freest in France, whore the
modem economic culture was commercial rather than mechanical.
And when the machine discipline aerioosl; invaded France, Fositiviam
langaiHhed and di<M]. But modeni science la not a calculus airaply.
It deals not with calculations of qnantitativc equivalence only, but
with efficient caiiaes, active retatioua, creative forces. The concept of
efficient cauae is not a derivative of accountancy, nor la it formed in
the Image of accountancy. But this (Eeneric concept of efficient caoae,
the klDetlc concept, antedates Fositivlsm and hia outlived it. Id Iia
earlier (eighteenth-century) phase this concept showa cloae relation-
ship with the notion of workmanship, in its later (nineteenth-century)
use it has much In common with the notion of mochanioal efficiency.

368 THE THEOEY OF BUSINESS ENTERPEI8E

acter, so to speak, is transfused into the product,
and to whose vvorkiugs tlie rest of the complex of
causes are related only as subsidiary or couditioning
circumstances. To the technologist the process
comes necessarily to coimt, not simply as the inter-
val of functioning of an initial efficient cause, but
as the substantial fact that engages his attention.
He learns to think in terms of the process, rather
than in terms of a productive cause and a product
between which the process intervenes in such a man-
ner as to afford a transition from one to the other.
The process is always complex ; always a delicately
balanced interplay of forces that work blindly, in-
sensibly, heedlessly ; in which any appreciable devi-
ation may forthwith count in a cumulative manner,
the further consequences of which stand in no or-
ganic relation to the purpose for which the process
has been set going. The prime efficient cause falls,
relatively, into the background and yields prece-
dence to the process as the point of technological
interest.

This machine technology, with its accompanying
discipline in mechanical adaptations and object-
lessons, came on gradually and rose to a dominating
place in the cultural environment during the closing
years of the eighteenth and the course of the nine-
teenth century ; and as fast as men learned to think
in terms of technological process, they went on at an
t accelerated pace in the further invention of mecha'

rdVIMZATlON AHD THE MACHINE PROCESS 369

cal procesaes, so that from that time the progress of
inventions has been of a cimiulative character and
has cumulatively heightened the disciplinary force
of the machine process. This early technological
advance, of course, took place Iq the British com-
munity, where the machine process first gained
headway and where the discipline of a prevalent
machine industry inculcated thmking in terms of
the machine process. So also it was in the British
community that modern science fell mto the lines
marked out by technological thinking and began
to formulate its theories in terms of process rather
than in terms of prime causes and the like. While
Bomething of this kind is noticeable relatively
•ly in some of the inorganic sciences, as, e.g.,
logy, the striking and decisive move in this
direction was taken toward the middle of the
century by Darwin and his contemporaries.' With-
out much preliminary exposition and without
iling himself to be out of touch with his con-
imporaries, Darwin set to work to explain spe-
in terms of the process out of which they j
arisen, rather than out of the prime cause to
the distinction between them may be due^
mying nothing as to the substantial services of the

Bomi

* Darwin, of course, does not Htand atone. He U tbe great expo-
t of a niaas roovemenl wbloh involfea a shifting of the point of
tr and of the point of interest in Bcientlfic research and apeculaUon.
■This ia Ihe solMbuioe of Darwin's sdvauce over Lamarch, for

THE THEOUY OF RirSINKSS liNTERl'ItlSE

Great Artificer in the developaient of species, he
simply and naively left Him out of the scheme,
because, as being a personal factor, He could not be
stated and handled in terms of process. So Darwin
offered a tentative account of the descent of man,
without recourse to divine or human directive
endeavor and without inquiry as to whence man
ultimately came and why, or as to what fortune
would ultimately overtake him. His inquiry
characteristically confines itself to the process of
cumulative change. His results, as well as his
specific determination of the factors at work in
this process of cumulative change, have been ques-
tioned ; perhaps they are open to all the criticisms
levelled against them as well as to a few more not
yet thought of ; but the scope and method given
to scientific inquiry by Darwin and the generation
whose spokesman he is has substantially not been
questioned, except by that diminishing contingent
of the faithful who by force of special training or
by native gift are not amenable to the discipline of
the machine process. The characteristically modem" — :
[ science does not inquire about prime causes, design
1 in nature, desirability of effects, ultimate results, or -J
I eschatological consequences.

Of the two postulates of earlier modern science,
— the quantitative equivalence and the qualitative
equivalence of cause and effect, — the foimer has
come practically to signify the balanced articula-

rCIVILIZATION AND THE SiArill-NK I'liOCESS 371

tion of the process ot cumulative change; the
endeavor o£ the Positivlsts to erect this canon of
quantitative equivalence into the sole canon of
scientific truth, and so to reduce scientific theory
to a system of accomitancy, having failed. The
latter thesis, that like causes produce like effetts, or
that the effect is, in some sense, of the same char-
acter as the cause, has fallen into decay as holding
true only in such tenuously general terms as to
leave it without particular force. The scientists are
learning more and more consistently to think in the
opaque, impersonal terras of strains, mechanical
structures, displacement, and the like ; terms
which are convertible into the working drawings
and specifications of the mechanical engineer.

The older preconceptions are, of course, not
wholly eliminated from the intellectual apparatus
of scientific research and generalization. The
cultural situation whose discipline gives the out-
come is made up of inherited traditional notions at
least as much as of tlie notions brought in by the
machine process. Even among the scientific adepts
there has been no complete break with the past:
necessarily not, since they are, after all, creatures
of their own generation. Many of them, but more
especially those who are engaged in upholding the
authentic results of scientific research, are somewhat
prone to make much of the definitive results
achieved, rather tlian of the process of research

372 THE THEORY OF BUSINESS ENTERPRISE

in which these results are provisional appliances
uf work. And many of these, together with the
great part of those well-meaning persons who
exploit the sciences for purposes of edification,
such as clergymen and naturalistic myth-makers,
still personify the process of cause and effect and
find in it a well-advised meliorative trend. But '
that work of research which effectually extends the
borders of scientific knowledge is nearly all done
under the guidance of highly impersonal, mechani-
cal, morally and jesthetically colorless conceptiona
of causal sequence. And this scientific work is
carried out only in those communitie.s which are in
due contact with the modem mechanically organized
industrial system, — only under the shadow of the
machine technology.

In the miture of the case the cultural growth
dominated by the machine industry is of a scep-
tical, mattei'-of-fact complexion, materialistic, im-
moral, unpatriotic, undevout. The growth of habits
of thought, in the industrial regions and centres
particularly, runs in this direction ; but hitherto
there has enough of the ancient norms of Western
Christendom remained intact to make a very re-
spectable protest against that deterioration of the
cultural tissues which the ferment of the machine
industry unremittingly pushes on. The machine
discipline, however, touches wider and wider circles

CIVILIZATION AND THE MACHINE PROCESS 373

of the population, and touches them in an increas-
ingly intimate and coercive manner. In the nature
of the case, therefore, the resistance opposed to
this cultural trend given by the machine discipline
on grounds of received conventions weakens with
the passage of time. The spread of materialistic,
matter-of-fact preconceptions takes place at a cumu-
latively accelerating rate, except in so far as some
other cultural factor, alien to the machine disci-
pline, comes in to inhibit its spread and keep its
disintegrating influence within bounds.

CHAPTER X

THE NATLRAL DECAY OF BUSINESS ENTERPRISE

Broadly, the machine discipline acts to disin-
tegrate the institutional heritage, of all degreea of
antiquity and authenticity — whether it be the
institutions that embody the principles of natural
liberty or those that comprise the residue of more
archaic principles of conduct still current in civil-
ized life. It thereby cuts away that groimd of
law and order on which business enterprise is
founded. The further cultural bearing of this
disintegration of the received order is no doubt
sufficiently serious and far-reachmg, but it does not
directly concern the present inquiry. It comes in
question here only in so far as such a deterioration
of the general cultural tissues involves a aet-back
to the continued vigor of business enterprise. But
the future of business enterprise is bound up with
the future of civilization, since the cultural scheme
is, after all, a single one, comprising many inter
locking elements, no one of which can be greatly
disturbed without disturbing the working of ftU
the rest.

In its bearing on the question in hand, the

piATURAL DECAY OF UrSINESS EXTEUrRISE 37"i

■'social problem" at large presents this singular
situation. Tlie growth of business enterprise rests \
on the machine technology as its malarial foundar i
tion. The machine industry is indispensable to it ; 'i
it cannot get along without the machine procesB.
But the discipline of the machine process cuts away
the spiritual, institutional foundations of business i
enterprise ; the machine industry is incompatible
with its continued growth j it cannot, in the long
run, get along with the machine process. In their
struggle against the cultural effects of the machtue
process, therefore, business principles cannot win
in the long run ; since an effectual mutilation or
inhibition of the machine system would gradually
push business enterprise to the wall ; whereas with
a free growth of the machine system business prin-
ciples would presently fall into abeyance.

The institutional basis of business enterprise —
the system of natural rights — appears to be a
peculiarly unstable affair. There is no way of re-
taining it under changing circumstances, and there
is no way of returning to it after circumstances
have changed. It is a hybrid growth, a blend of
personal freedom and equality on the one hand
and of prescriptive rights on the other hand. The
institutions and points of law under the natural-
rights scheme appear to be of an essentially
provisional chantcter. There is relatively great
flexibility and possibility of growth and change ;

376 THE THEORY OF BUSINESS ENTERPRISE

(

I natural rights are singularly insecure under any
change of circumstances. The maxim is well
approved that eternal vigilance is the price of
(natural) liberty. When, as now, this system is
endangered by socialistic or anarchistic disaffection
there is no recourse that will carry the institutional
apparatus back to a secure natural-rights basb.
The system of natural liberty was the product of a
peaceful regime of handicraft and petty trade ;
but continued peace and industry presently carried
the cultural growth beyond the phase of natural
rights by giving rise to the machine process and
the large business ; and these ai-e breaking down
the structure of natural rights by making these
rights nugatory on the one hand and by cutting
away the spiritual foundations of them on the
other hand. Natural rights being a by-product of
peaceful industry, they cannot be reinstated by a
recourse to warlike habits and a coercive govern-
ment, since warlike habits and coercion are alien
to the natural-rights spirit. Nor can they be
reinstated by a recourse to settled peace and
freedom, since an era of settled peace and freedom
would push on the dominance of the machine
process and the large business, which break down
the system of natural liberty.

— When the question is cast up as to what will
come of this conflict of institutional forces —
called the Social Problem — it is commonly made

' NATURAL DECAY OF BUSINESS ENTERPRISE 377

a question of remedies : What can be done to save
civilized mankind from the vulgarization and dis-
integration wrought by the machine industry?

Now, business enterprise and the machine process
are the two prime movers in modem culture ; and
the only recourse that holds a promise of being
effective, therefore, is a recourse to the workings
of business traffic. And this is a question, not of
what is conceivably, ideally, idyllically possible for
the business community to do if they will take
thought and act advisedly and concertedly toward
a chosen cultural outcome, but of what is the
probable cultural outcome to be achieved through
business traffic carried on for business ends, not for
cultural ends. It is a question not of what ought
to be done, but of what is to take place.

Persons who are solicitous for the cultural future
commonly turn to speculative advice as to what
ought to be done toward holding fast that which
is good in the cultural heritage, and what ought
further to be done to increase the talent that has
been intrusted to this generation. The practical
remedy offered is commonly some proposal for
palliative measm^es, some appeal to philanthropic,
aesthetic, or religious sentiment, some endeavor
to conjure with the name of one or another of the
epiphenomena of modern culture. Something must
be done, it is conceived, and this something takes
^the shape of charity organizationB, clubs and

378 THE THEORY OF BUSINESS ENTERPR

societies for social " purity," for armisement, educar
tion, and manual training of the indigent classes,
for colonization of the poor, for popularization of
churches, for clean politics, for cultural missionaiy
work by social settlements, and the like. These
remedial measures whereby it is proposed to save
or to rehabilitate certain praiseworthy but obso-
lescent habits of life and of thought are, aJl and
several, beside the point so far as touches the
question in hand. Not that it is hereby intended
to cast a slur on these meritorious endeavors to save
mankind by treating symptoms. The symptoms
treated are no doubt evil, as they are said to be ;
or if they are not evil, the merits of that particular
question do not concern the present inquiry. The
endeavors in question are beside the point in that
they do not fall into the shape of a business propo-
sition. They are, on the whole, not so profitable
a line of investment as certain other ventures that
are open to modern enterprise. Hence, if they
traverse the course of business enterprise and of
industrial exigencies, they are nugatory, being in
the same class with tlie labor of Sisyphus ; whereas
if they coincide in effect with the line along which
business and industrial exigencies move, they are a
work of supererogation, except so far as they may
be conceived to accelerate a change that is already
under way. Nothing can deflect the sweep of
business enterprise, unless it be an outgrowth

th of I

this enterprise itself or of the industrial means by
which business enterprise works.

Nothing can serve as a corrective of the cultural |
trend given by the machine discipline except what /
can be put in the form of a business proposition. (
The question of neutralizing the untoward effects
of the machine discipline resolves itself into a
question as to the cultural work and consequences
of business enterprise, and of the cultural value
of business principles in so far as they guide such
human endeavor aa lies outside the range of busi-
ness enterprise proper. It is not a question of
what ought to be done, but of what is the course
laid out by business principles ; the discretion
rests with the business men, not with the moral-
ists, and the business men's discretion is bounded
by the exigencies of business enterprise. Even •
the business men cannot allow themselves to
|day fast and loose with business principles in
leaponse to a call from humanitarian molivea.
The question, therefore, remahis, on the whole, a|
question of what the business men may be expected \
to do for cultural growth on the motive of profits. J

Something they are doing, as otliers are, from
motives of benevolence, with a well-advised en-

,vor to maintain the cultural gains of the past
|And to make the way of life smoother for man-

td in the futm-e. But the more secure and
llntantial results to be looked for in this direc-

380 THE THEORY OF BUSINESS ENTEEPE18E

tion are those that follow incidentally, as by-
products of business enterprise, because these
are not dependent on the vagaries of personal
preference, tastes, and prejudices, but rest on a
broad institutional basis.

The effects of business enterprise upon the
habits and temper of the people, and so upon
institutional growth, are chiefly of the nature of
sequelae. It has already been noted that the dis-
cipline of business employments is of a conserva-
tive nature, tending to sustain the conventions
that rest on natural-rights dogma, because these
employments train the men engaged in them to
think in terms of natural rights. It is unneces-
sary to retiu-n to this topic here, except to notice
that, in its severer, more unmitigated form, this
discipline in pecuniary habits of thought falls on
a gradually lessening proportion of the population.
The absolute number of business men, counting
principals and subordinates, is, of course, not
decreasing. The number of men in business
pursuits, in proportion to the population, is also
apparently not decreasing ; but witliin the business
employments a larger proportion are occupied
with office routine, and so are withdrawn from
the more effectual training given by business man-
agement proper. If such a decrease occurs in any
country, it is almost certainly not to be found in
an^- other country than America.

HATUEAL DECAY OF BUSINESS ENTEKl'RISE 381

^H This business diacipline is aomewbat closely
Kmited both in scope and range. (1) It acts to
conserve, or to rehabilitate, a certain restricted
line of institutional habits of thought, viz. those
preconceptions of natural rights which have to
do with property. What it conserves, therefore,
IB the bourgeois virtues of solvency, thrift, and
dissimulation. The nobler and more spectacular
aristocratic virtues, with their correlative institu-
tional fiUTiiture, are not in any sensible degree
fortified by the habita of business life. Business
life does not further the growth of manners and
breeding, pride of caste, pimctilios of "honor," or
even religious fervor. (2) The salutary discipline
of business life touches the bulk of the population,
the working classes, in a progressively less inti-

»mate and less exacting manner. It can, therefore,
Bot serve to correct or even greatly to mitigate
the matter-of-fact bias given these classes by the
discipline of the machine process.

»A8 a direct disciplinary factor the machine process
holds over the business employments, in that it
touches larger classes of the community and incul-
cates its characteristic habits of thought more unre-
mittingly. And any return to more archaic methods
of industry, such as is sometimes advocated on ar-
tistic ground-s, seems hopeless, since business inter-
eets do not countenance a discontinuance of machine
^Hffiethods. The machine methods that are corruptr

382 THK THEORY OF BUSINESS ENTERVRISE

ing the hearts and manners of the workmen an
profitable to the buainess men, and that fact seenia
to be decisive on the point. A direct, advised
return to handicraft, or any similar discontinuance
of the machine industry, is out of the question;
although something in the way of a partial return
to more primitive methods of industry need not be
impracticable as a remote and indirect consequence
of the working of business enterprise.

The indirect or incidental cultural bearing of buai-
ness principles and business practice is wide-reaching
and forceful. Business principles have a peculiar
hold upon the affections of the people as something
intrinsically riglit and good. They are therefore
drawn on for guidance and conviction even in
concerns that are not conceived to be primarily
business concerns. So, e..fj., they have permeated
the educational system, thoroughly and intimately.
Their presence, aa an element of common sense,
in the counsels of the " educators " shows itself
in a naive insistence on the "practical" whenever
the scheme of instruction is under advisement.
"Practical" means useful for private gain. Any
new departure in public instruction, whether in
the public schools or in private endowed establish-
ments, is scrutinized with this test in mind ; which
results in a progre.sstve, though not wholly con-
sistent, narrowing of instruction to such teaming

NATURAL DECAY OF BUSINESS ESTKRPRISE 383

as is designed to give a ready application of re-
sults rather than a systematic organization of
knowledge. The primary test is usefulness fur
getting an income. The secondary teat, practi-
cally applied where latitude is allowed in the
way of " culture " studies, is the aptness of the
instruction in question to fit the learners for
spending income in a decorous manner. Hence
quasi-scholarly accomplishments. Much of the '
current controversy as to the inclusion or exclusion
of one thing and another from the current curric- ,
ulum of secondary and higher schools miglit be
reduced to terms of one or the other of these two ;
purposes without doing violence to the arguments I
put forth and with a great gain in conciseness and (
lucidity. /

There is also a large resort to business meCEods
I in the conduct of the schools ; with the result that
a system of scholastic accountancy is enforced both
) regards the work of the teachers and the pnig-
ress of the pupils ; whence follows a mechanical
routine, with mechanical tests of competency in
[ all directions. This lowers the value of the
r instruction for purposes of intellectual initiative
[ and a reasoned grasp of the subject-matter. This
[ daas of erudition is rather a hindrance than a help
to habits of thinking. It conduces to conviction
rather than to inquiry, and is therefore a con-
•ervative factor.

3S4 THE THEORY OF BUSINESS ENTERPRISE

In the endowed schools there is, moreover, an
increasiag introduction of business men and buflinesfl
methods into the personnel and the administrative
work. This is necessarily so since these schools are
competitors for students and endowments. The
policy of these schools necessarily takes on some-
thing of the complexion of competitive business;
which throws the emphasis on those features of
school life that wUl best attract students and donors.
The features which count most directly in these di-
rections are not the same as would count most
effectively toward the avowed ends of these schools.
The standards which it La found imperative to live
up to are not the highest standards of scholarly
work. Courtesy as well as expediency inclines
these schools to cultivate such appearances and
such opinions as may be expected to find favor
with men of wealth. These men of wealth are
business men, for the most part elderly men, who
are, as ia well known, prevailingly of a conserva-
tive temper in all cultural matters, and more
especially as touches those institutions that bear
on bxisiness affairs.

A more fai^reaching department of the educa-
tional system, though not technically rated as
such, is the periodical press, both newspapers
and magazines. This is a field of business enter-
prise, and business principles may he expected to
work more consistently and to a more unqualified

ATUBAL DECAY OF BUSINESS ENTERPRISE 385

Kult in this field than in the school system,
■■Tfhere these principles come in incidentally.

The current periodical press, whether ephemeral
or other, is a vehicle for advertisements. This is
its raison d'Ure, as a business proposition, and this
decides the lines of its management without mate-
rial qualification. Exceptions to the rule are
official and minor propagandist periodicals, and,
in an uncertain measure, scientific journals. The
profits of publication come from the sale of adver-
tising space. The direct returns from sales and
Bubscriptions are now a matter of wholly second-
ary consequence. Publishers of periodicals, of all
grades of transiency, aim to make their product
as salable as may be, in order to pass their adver-
tising pages under the eyes of as many readers as
■ be. The larger the circulation the greater,
<»ther things equal, the market value of the adver-
tising space. The highest product of this develop-
ment is the class of American newspapers called
"independent." These in particular — and they
are followed at no great interval by the rest —
sdit all items of news, comment, or gossip with

view to what the news ought to be and
trhat opinions ought to be expressed on passing
(rente.'

The first duty of an editor is to gauge the senti-

1 >> Ongbt " U of eoune hero used to denote biuineiia expedieDvy ,

386 THE THEORV OF BUSINESS KNTERPBISE

ments of his readers, and then tell them what they
like to beUeve. By this means he maintains or
increases the circulation. His second duty is to
see that nothing is said in the news items or edi-
torials which may discountenance any claims or
announcements made by his advertisers, discredit
their standing or good faith, or expose any weak-
ness or deception in any business venture that is
or may become a valuable advertiser. By this
means he increases the advertising value of his
circulation.' The net result is that both the news
columns and the editorial columns are commonly
meretricious in a high degree.

Systematic insincerity on the part of the osten-
sible purveyors of information and leaders of
opinion may be deplored by persons who stickle
for truth and pin their hopes of social salvation
on the spread of accurate information. But the
ulterior cultural effect of the insincerity which is
in this way required by the business situatioQ
may, of course, as well be salutary as the reverse.
Indeed, the effect is quite as likely to be salutary,
if "salutary" be taken to mean favorable to the
maintenance of the established order, since the
insincerity is guided by a wish to avoid any
lesion of the received preconceptions and preju-

> As a. Bide lloe, whicli oiffiirds pUj for the Blafl'a creative Ulenl,
whfttCTer is eicepUanBllj aensationat at the same lime that it in hann-
leaa to the adveitiseis' int«reata should, in newapaper alaug, be " plajed
up."

Hatubal decay or bcslsess entckprise 3s:

dices. The inanceritj of the newspKpen and
magazines seems, un tbe whole, to be of a
conservative trend.

The periodical press is not onlj a purreyor of
news, opinions, and admonitions; it also suppli«t!
the greater part of the literature cmrenOy read.
And in this part of its vtork the same underlying
business principles are in force. The endea^'or ts
to increase the circulation at any cost that will
result in an increased net return from the sale of
the advertising space. The literary output of the
magazines is of use for carrjing the advertising
pages, and as a matter of business, as seen from
the standpoint of tlie business man's interest, that

its only use.

The standards of e.\cellence that govern this
periodical literature seem fairly to be formulated
as follows : (1) In each given case it must cunforiii
to the tastos and the most ready comprehension of
6 social strata which the particular periodical i.t
lesigned to reach ; (2) it should amduce to a

ickened interest in the various lines of services

d commodities offered in the advertising pageo,

md should direct the attention of readers along

ifluch lines of investment and expenditure as may

lefit the large advertisers particularly. At least

must in no way hamtier the purposes of the
Ivertisera. Nothing alioiild go in a popular

,gazine which would cast a sinister shadow over

THE THEOEY OF BUSINESS ENTEBPBISE

any form of bosiness venture that advertiaee or
might be induced to advertise.'

Taken in the aggregate, the literary output ia
designed to meet the tastes of that large body of
people who are in the habit of buying freely. ITie
successful magazine writers are those who follow
the taste of the class to whom they speak, in any
aberration (fad, mannerism, or misapprehension)
and in any shortcoming of insight or force which
may beset that class. They must also conform to
the fancies and prejudices of this class as regards
the ideals — artistic, moral, religious, or social — for
which they speak. The class to which the success-
ful periodicals turn, and which gives tone to
periodical literature, ia that great body of people
who are in moderately easy circumstances. Cul-
turally this means the respectable middle class
(largely the dependent business class) of various
shades of conservatism, affectation, and snobbery.*

On the whole, the literature provided in this way
and to this end seems to run on a line of slightly
more pronounced conservatism and affectation than
the average sentiment of the readers appealed to.

' BnainesB enierprisea tbnt are not notable advertisers may ba
roundly taken to task, as, «.;/., Ihe Standard Oil Company or the Ameri'
can Sugar Refining Company ; and, indeed, it may be slirewd man-
agement to abuse these concerns, since such abuse redounds to tbe
periodical's reputation for popular Bympathy and independence.

■ "Snobbery" is here used without digreepect, as a convenient
term to denote Che element of strain involved In the quest of genUlliy
on the part of persons whose accustomed social siaDdiug is lew hi^
or leas autb«uUo Uiui Uieii Mpirations.

FWATUliAL DECAY OF BUSmESS ENTEEPR18E 389

HiU is true (or the following reason. Beaders
who are less conBervative and less patient of affec-
tations, snobbery, and illiberality than the average
are in the position of doubters and dissentients.
They are less confident in their convictions of
what is right and good in all matters, and are also
not unwilling to make condescending allowances for
those who are less " advanced," and who must be
humored since they know no better ; whereas those
who rest undoubttng in the more conservative
views and a more intolerant affectation of gentility
are readier, because more naive, in their rejection
of whatever does not fully conform to their habits
of thought.

So it comes about that the periodical literature
is, on the whole, somewhat more scrupulously
devout in tone, somewhat more given to laud and
dilate upon the traffic of the upper leisure class
and to carry on the discussion in the terms and
tone imputed to that class, somewhat more prone
to speak deprecatingly of the vulgar innovations
of modem culture, than the average of the readers
to whom it is addressed. The trend of its teach-
iilg, thfiEefore,.is, oa_the whole, co nservativ e and_
concil^±ory. It is also under the necessity of
adapting itself to a moderately low average of
intelligence and information ; since on this head,
again, it is those wbo ponsess intelligence and infor-
lation that are re.ulipHt to mnke allowances ; tliey

HnatK

390 THE THEORY OF BUSINESS ENTERPKISE

are, indeed, mildly flattered to do so, besides being
the only onea who can. It is a piime requisite to

conciliate a large body of readers.

This latter characteristic is particularly evident
in the didactic portion of the periodical literature.
This didactic literature, running on discussions of
a quasi-artistic and quasi-scientific character, is, by
force of the business exigencies of the case, de-
signed to favor the sensibilities of the weaker
among its readers by adroitly suggesting that the
readers are already possessed of the substance of
what purports to be taught and need only be
fortified with certain general results. There
follows a great spread of quasi-technical terms and
fanciful conceits. The sophisticated animal stories
and the half-mythical narratives of industrial pro-
cesses which now have the vogue illustrate the
results achieved in this direction.

The literary output issued under the surveil-
lance of the advertising office is excellent in
workmanship and deficient in intelligence and
substantial originalitj'. What is encouraged and
cultivated is adroitness of style and a piquant
presentation of commonplaces. Harmlessness, not
to say pointlessness, and an edifying, gossipy
optimism are the substantial characteristics, which
persist through all ephemeral mutations of style,
manner, and subject-miitter.

nvisinesR enterprise, therefore, it is believed.

|7!u,

NATURAL DECAY OF BUSINESS ENTERPRISE 391

gives a salutary bent to periodical literature. It J
conduces mildly to the maintenance of archaic /
ideals and philistine affectations, and inculcates I
the crasser {orms of patriotic, sportsmanlike, and
spendthrift aspirations. ^

The largest and most promising factor of cul-
tural discipline — most promising as a corrective
of iconoclastic vagaries — over which business
principles rule is national politics. The purposes
and ttie material effects of business politics have
already been spoken of above, but in the present
connection their incidental, disciplinary effects are
no less important. Business interests urge an
aggressive national policy and business men direct
: it. Such a policy is warlike as well as patriotic.
I The direct cultural value of a warlike business policy
I is unequivocal. It makes for a conservative ani-
I mus on the part of the populace, During war time,
I and within the military organization at all times,
[ under martial law, civil rights are in abeyance ;
and the more warfare and armament the more
I abeyance. Military training is a training in cere-
imonial precedence, arbitrary command, and un-
V questioning obedience. A military organization
I is essentially a servile organization. Insubordi-
* nation is the deadly sin. The more consistent
L and the more comiireliensivc this military training,
|.the more effecliuilly will the members of the cum-

392 THE THEORY OF BUSINESS ENTEKPEISE

munitj be trained into habits of eubordication and
away from that growing propeosity to make light
of personal authority that is the chief infirmity of
democracy. This applies first and most decidedly,
of course, to the soldiery, but it applies only in a
less degree to the rest of the population. They
learn to think in warlike terms of rank, authority,
and subordination, and so grow progressively more
patient of encroachments upon their civil rights.
Witness the change that has latterly been going
on hi the temper of the German people.'

The modern warlike policies are entered upon
for the sake of peace, with a view to the orderly
pursuit of business. In their initial motive they
differ from the warlike dynastic politics of the
sixteenth, seventeenth, and eighteenth centuries.
But the disciplinary effects of warlike pursuits and
of warlike preoccupations are much the same what-
ever may be their initial motive or ulterior aim.
The end sought in the one case was warlike mas-
tery and high repute in the matter of ceremonial
precedence; in the otlier, the modem case, it is
pecuniary mastery and high repute in the matter
of commercial solvency. But in both cases alike
the pomp and circumstance of war and armaments,
and the sensational appeals to patriotic pride and

' Cf., e.g., Maurice Lair. Vlmperialifne allfmoRd, especially ch. IL
ami in. Tbe like change of Bentiment is vislbte in the British com-
inunity. CI, HobsoD, Impeilaiisin, especiaUy pt. II. cb. I. and UL

KATURAL DECAY OF BUSINESS ENTERPRISE 393

animosity made by victories, defeats, or compari-
sons of military and naval strength, act to rehabili-
tate lost ideals and weakened convictions of the
chauvinistic or dynastic order. At the same
stroke they direct the popular interest to other,
nobler, institutionally less hazardous matters than
the unequal distribution of wealth or of creature
comforts. Warlike and patriotic preoccupations
fortify the barbarian ^'irtues of subordination and
prescriptive authority. Ha bitu ation to a warWte,
predatory scheme gf ^life^ ia the. gfcro5f;; eBt disci-
pllnS^^^^^^^that can be brougli tto count eract
the vulgs^^^iQQ^^^^^emTife'^rou^t b^peagp-
ful industfy^and the mac hine process, and to reha-
bilitate the deca^nng sense of status and diSerential
dignity. Warfare, with the stress on subordination
and mastery and the insistence on gradations of
dignity and honor incident to a militant organiza-
tion, has always proved an efEective school in
barbarian methods of thought.

In this direction, evidently, lies the hope of a
corrective for "social unrest" and similar dis-
orders of civilized life. There can, indeed, be no
serious question but that a consistent return to the
ancient virtues of allegiance, piety, servility, graded
dignity, class prerogative, and prescriptive author-
ity would greatly conduce to popular content and
to the facile management of affairs. Such is the
promise held ont by a strenuous national policy.

394^^THE THKUKY OF BUSINESS KNTEIIPEISE

The reversional trend given hy warlike ex-
perience and warlike pi-eoccupatious, it is plain,
does not set backward to the regime of natural
liberty. Modern ttusiness principles and the
modern scheme of civil rights and constitutional
government rest on natural-rights ground. But
the system of natiu-al rights is a halfway house.
The warlike cultme takes biick to a more archaic
situation that preceded the scheme of natural
rights, viz. the system of absolute government,,
dynastic poUtics, devolution of rights and honors,
ecclesiastical authority, and popular submission
and squalor. It makes not for a reinstatement
of the Natural Rights of Man but for a reversion
to the Grace of God.

The bai'bai'ian virtues of fealty and patriotism
run on national or dyuaatic exploit and aggrandize-
ment, and these archaic virtues are not dead. In
those modern communities whose hearts beat with
the pulsations of the world-market they find ex-
pression in an entlmsiasm for the commercial
aggrandizement of the nation's business men.
But when once the policy of warlike enterprise
has been entei-ed upon for business ends, these
loyal affections gradually shift from tlie business
interests to the warlike and dynastic interests, as
witness the history of imi^rialism in Gennany and
England. The eventual outcome should be a re-
habilitation of the ancient patriotic animosity and

Statural becay of business enteuprisf s'Ju

dynastic loifalty, to the relative neglect of bueineas
interests. This may easily be carried ao far as to
sacrifice the profits of the business men to the
exigencies of the higher politics.'

The disciplinary effect of war and armaments
and imperialist politics is complicated with a
selective effect. War not only affords a salutaiy
training, but it also acts to el iminate certain
elements of the population. The work of cam-
paigning and militjiry tenurej such as is carried
on by England, America, or the other civilizing
powers, lies, in large part, in the low latitudes,
where the European races do not find a favorable
liabitat. The low latitudes are particularly un-
wholesome for that dolioho-blond racial stock
that seems to be the chief bearer of the machine
industry. It results that the viability and the
natural increase of the soldiery is perceptibly
lowered. The service in the low latitudes, as
contrasted with Europe, for instance, is an extra-
hazardous occupation. Tlie death rate, indeed,
exceeds the birth rate. But in the more advanced
industriiil communities, of which the English and
American are typical, the service is a volunteer
service ; which means that those who go to the
wars seek this employment by their own choice.
That is to say, the human material so drawn off
ia automatically selected on the basis of a peculiar

^m < n.. f.-J., Hlll^<«Il, ImptrMism, pi. II. l'Ii. VIl.

396 THE THEORY OF BUSINESS ENTERPRISE

spiritual fitneaa for this predatory employment;
they are, on the whole, of a more malevolent and
vagabond temper, have more of the ancient bar-
barian animus, than those who are left at home
to carry on the work of the home commuuity
and propagate the home population. And since
the troops and ships are officered by the younger
sons of the conservative leisure class and by the
buccaneering scions of the class of professional
politicians, a natural selection of the same char-
acter takes effect also as regards the officers.
There results a gradual selective elimination of
that old-fashioned element of the population that
is by temperament best suited for the old-fash-
ioned institutional system of status and servile
organization.'

> The selective efiect of warfare, botb HDcieni and modem, haa
been discoasod by various wrilere. ProLracWd wars or a w&rlike policy
alwRye have some such effect, no doubt, aud in old times this has
stiQwu itself to be a serious cultural factor. It is comuonly regarded
that the selection resulla in an elimination of the "besf" hnman
material. Perhaps Uie most cogent spokeaman for thia view is D. S.
Jordan, The Blovd of the X^atlon. The " best " in this CBse must be
taken to mean the best for the purpose, not neceararily for olher pnr-
poses. In such a case as tbe Chinese or the Jewish peoples, e.g., ft
very loug-cou tinned, though not in both caaea a close, selective elimi-
nation of the peace-disturbing elements has left a residue that is hlghl;
efBcient (" good ") in certain directions, but not good war material.
The case of the North-European peoples, however, in the present junc-
ture is somewhat different from these. Raciotl;, the most eflcienl
war material among them seems Ui be those elements that conl:^ an '
appreciable admixture of the dolicbo-blond stock. These elements at ,
the same time are apparently, on the whole, ahn the o
ally endowed with industrial Initiative and a large) aptitude for tbr
machine lechuology and sclentiQc reaeaieh. Selective elimination b;

IUATUliAL DECAY OF BUSINESS ENTERPRISE 397
This selective elimination of conservative ele-
ments would in the long run leave each succeeding
generation of the communitj less predatory and
less emulative in temper, less well endowed for
carrying on its life under the servile institutions
proper to a militant rdgime. But, for the present
and the nearer future, there can be little doubt
but that this selective shaping of the community's

►animus is greatly outweighed by the contrary
Arend given by the discipline of warlike preoccu-
jKitions. What helps to keep the balance in
favor of the reversional trend is the cultural
leaven carried back into the home community
by the veterans. These presumptive past masters
in the archaic virtues keep themselves well in the
public eye and serve as exemplars to the impres-
aiouable members of the community, particularly
to the less mature.'

war and militAry tenure in the ease of these peoples should, therefore,
apparently lower boli their fighting capacity and their industrial and
Intellectnal capacity ; so that, hy force of this douhle and cumulative
effect, the resulting national declbie should in their case be compre-
hensive and relatively precipitate.

> With the complpment of archaic virtnes that invests these sdepbi
there is also associated a. fair complement of those more elemental
vices thai are grotvlni; obsolete in the peaceable civilised ccimmuuittes.
Buch debaucheries, extravflKances of cruelty, and general superfluity
of naughtiness as are nameless or linposBlble in civil life are blikiiielesit
matters of cfiarsB In the service. In the nature of the case they are
Inseparable from the service. The serviee commonly leaves the vet-
erans physical, Intellectual, and moral invsJlds (as witness the ^^aorda
of the Pension Office). Rut these less handsome cnncomllonU of the
service should scarcely bu made a point ut r«proacli to lliose bmve
:s hns led ttiein

398 THK THEORV OK BUSINESS ENTERPRISE

The net outcome of the latter-day return to
warlike enterprise is, no doubt, securely to be
rated as fostering a reveraion to national ideals of
servile status and to institutions of a despotic
character. On the whole and for the pres-
ent, it makes for conservatism, ultimately for
reversion.

The quest of profits leads to a predatory na-
tional policy. The resulting large fortunes call
for a massive government apparatus to secure
the accumulations, on the one hand, and for lai^e
and conspicuous opportunities to spend the resultr
ing income, ou the other hand ; which means
a militant, coercive home administration and some-
thing in the way of an imperial court life —
a dynastic fountain of honor and a courtly
bureau of ceremonial amenities. Such an ideal
is not simply a moralist's day-dream ; it is a
sound business proposition, in that it lies on the
line of policy along which the business interest*"

rare moving in their own behalf. If national
(that is to say dynastic) ambitions and warlike
aims, achievements, spectacles, and discipline be
giveii a large place in the community's life,
together with the concomitant coercive police
siu-veillance, then there is a fair hope that the

by the paths nf disease iind depravity. Nor are the accumulated vices
lo be lightly condemned, (tince their weight also falls on lliB conserrv
tive side; being archaic ami aulheiitli'nted, tlieir cnlniral bcarinit i».
un the whole, siihitary

■ NATURAL DECAY OF BUSINESS ENTERPRISE 393

disintegrating treud of the machine discipline
may be corrected. Tlie regime of status, fealty,
prerogative, and arbitrary command would guide
the institutional growth back into the archaic
conventional ways and give the cultural structure
something of that secure dignity and stability
which it had before the times, not only of social-
istic vapors, but of natural rights as well. Then,
too, the rest of the spiritual furniture of the
ancient regime shall presumably be reinstated ;
materialistic scepticism may yield the ground to
a romantic philosophy, and the populace and the
scientists alike may regain something of that
devoutness and faitli in preternatural agencies
which they have recently been losing. As the
discipline of prowess again comes to its own,
conviction and contentment with whatever is
authentic may return to distracted Christendom,
and may once more give something of a sacra-
mental serenity to men's outlook on the present
and the future.

But authenticity and sacramental dignity belong
neither with the machine technology, nor with
modern science, nor with business traffic. In so
far as the aggressive politics and the aristo-
cratic ideals currently furthered by the business
commimity are worked out freely, their logical
outcome is an abatement of those cultural fea-

tures that distinguish modern times irum what

400 THE THEORY OF BUSINESS ENTERPRISE

went before, iucluding a decline of business
enterprise itaelf.'

How imminent such a consummation is to be
accounted is a question of how far the unbusiness-
like and unscientific discipline brought in by
aggressive politics may be expected to prevail
over the discipline of the machine industry. It
is difficult to believe that the machine technology
and the pursuit of the material sciences will be
definitively superseded, for the reason, among
others, that any community which loses these
elements of its culture thereby loses that brute
material force that gives it strength against its
rivals. And it is equally difficult to imagine how
any one of the communities of Christendom can
avoid entering the funnel of business and dynastic
politics, and so running through the process whereby
the materialistic animiis is eliminated. Which of
tlie two antagonistic factors may prove the stronger
in the long run is something of a blind guess ; but
the calculable future seems to belong to the one or
the other. It seems possible to say this much,
that the full dominion of business enterprise is
necessarily a transitory dominion. It stands to
lose in the end whether the one or the other of the
two divergent cultural tendencies wins, because it
is incompatible with the ascendancy of either.
» See ChapWr VIII. pp. S47-360.

3 biDS 004 'i?^ Q3h

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